Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, 8188-8234 [2019-03848]
Download as PDF
8188
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–104464–18]
RIN 1545–BO55
Deduction for Foreign-Derived
Intangible Income and Global
Intangible Low-Taxed Income
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations that provide
guidance to determine the amount of the
deduction for foreign-derived intangible
income and global intangible low-taxed
income. This document also contains
proposed regulations coordinating the
deduction for foreign-derived intangible
income and global intangible low-taxed
income with other provisions in the
Internal Revenue Code.
DATES: Written or electronic comments
and requests for a public hearing must
be received by May 6, 2019.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–104464–18), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to: CC:PA:LPD:PR (REG–104464–
18), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224. Alternatively,
taxpayers may submit comments
electronically via the Federal
eRulemaking Portal at https://
www.regulations.gov (REG–104464–18).
FOR FURTHER INFORMATION CONTACT:
Concerning proposed §§ 1.250(a)–1
through 1.250(b)–6, 1.962–1, 1.6038–2,
1.6038–3, and 1.6038A–2, Kenneth
Jeruchim at (202) 317–6939; concerning
proposed §§ 1.1502–12, 1.1502–13 and
1.1502–50, Michelle A. Monroy at (202)
317–5363 or Austin Diamond-Jones at
(202) 317–6847; concerning submissions
of comments and requests for a public
hearing, Regina L. Johnson, (202) 317–
6901 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
SUMMARY:
Background
This document contains proposed
amendments to 26 CFR part 1 under
sections 250, 962, 1502, 6038, and
6038A (‘‘proposed regulations’’).
Section 14202(a) of the Tax Cuts and
Jobs Act, Public Law 115–97 (2017) (the
‘‘Act’’), added section 250 to the
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
Internal Revenue Code (the ‘‘Code’’).1
The new section provides a domestic
corporation with a deduction (‘‘section
250 deduction’’) for its foreign-derived
intangible income (‘‘FDII’’) and its
global intangible low-taxed income
(‘‘GILTI’’) and the amount treated as a
dividend under section 78 which is
attributable to its GILTI. Section
14202(c) of the Act provides that section
250 and the conforming amendments in
section 14202(b) apply to taxable years
beginning after December 31, 2017.
Section 14201(a) of the Act (codified
in section 951A) requires a United
States shareholder (‘‘U.S. shareholder’’)
of any controlled foreign corporation
(‘‘CFC’’) for any taxable year to include
in gross income the shareholder’s GILTI
for the year. The Department of the
Treasury (‘‘Treasury Department’’) and
the IRS published a separate notice of
proposed rulemaking that provides
guidance to U.S. shareholders on how to
determine the amount of GILTI to
include in gross income. See 83 FR
51072 (Oct. 10, 2018).
Section 14302(a) of the Act also added
a new foreign tax credit category for
foreign branch income (defined in
section 904(d)(2)(J)), which is crossreferenced in section 250(b)(3)(A)(i)(VI).
The Treasury Department and the IRS
published a separate notice of proposed
rulemaking that provides rules for
determining a corporation’s foreign
branch income for purposes of section
904. See 83 FR 63200 (Dec. 7, 2018).
Explanation of Provisions
I. Overview of Proposed Regulations
In general, income earned directly by
a U.S. person on foreign business
income is subject to U.S. tax on a
current basis. Before the Act, foreign
business income earned indirectly by a
U.S. person through a foreign
corporation was not generally subject to
U.S. tax until such income was
distributed as a dividend to the U.S.
person. Certain anti-deferral regimes
could cause the U.S. owner to be taxed
on a current basis in the United States
regardless of whether the income had
been distributed as a dividend to the
U.S. owner. Sections 951 through 965 of
the Code (generally referred to as the
‘‘subpart F’’ provisions), applicable to
certain passive and mobile categories of
income earned by CFCs, is the main
anti-deferral regime of relevance to U.S.based corporate groups. However,
because subpart F does not generally
apply to active foreign business income
of a CFC (as defined in section 957(a)),
U.S. shareholders before the Act could
1 Except as otherwise stated, all section references
in this preamble are to the Internal Revenue Code.
PO 00000
Frm 00002
Fmt 4701
Sfmt 4702
indefinitely defer U.S. taxation with
respect to their foreign business
income—in particular, mobile income
arising from the exploitation of
intangible property—by allocating such
income to its CFCs operating in low- or
zero-tax jurisdictions. This system of
deferral, in turn, resulted in a ‘‘lock-out
effect,’’ whereby U.S. shareholders that
had allocated income to CFCs formed in
low- or zero-tax jurisdictions could not
repatriate such income to the United
States without incurring significant U.S.
tax.
In order to facilitate the efficient
redeployment of foreign earnings in the
United States, the Act established a
participation exemption system under
which certain earnings of a foreign
corporation can be repatriated to a
corporate U.S. shareholder without U.S.
tax. See section 14101(a) of the Act and
section 245A. However, Congress
recognized that, without any base
protection measures, the participation
exemption system could further
incentivize taxpayers to allocate
intangible income to CFCs formed in
low- or zero-tax jurisdictions because
the earnings related to such intangible
income could now be repatriated to the
United States without incurring any
U.S. tax. See Senate Committee on the
Budget, 115th Cong., ‘‘Reconciliation
Recommendations Pursuant to H. Con.
Res. 71,’’ at 370 (Comm. Print 2017)
(‘‘Senate Explanation’’). Therefore,
Congress enacted section 951A, which
subjects a U.S. shareholder’s ‘‘global
intangible low-taxed income’’ or
‘‘GILTI’’ (a new term created by the Act)
derived through its CFCs to U.S. tax on
a current basis, similar to the taxation of
such CFCs’ subpart F income under
section 951(a)(1)(A).
Most member countries of the
Organisation for Economic Co-operation
and Development (‘‘OECD’’) provide a
full or partial (e.g., 95 percent)
participation exemption with respect to
income of foreign subsidiaries
distributed to domestic shareholders.
See OECD (2018), Tax Policy Reforms
2018: OECD and Selected Partner
Economies, at 73, OECD Publishing,
Paris (Sept. 2018). While some countries
also have CFC inclusion regimes similar
to subpart F that subject certain narrow
classes of income of foreign subsidiaries
to current tax in the home country,
many countries do not subject active
foreign business income of foreign
subsidiaries to current tax. Congress
recognized that taxing such income at
the full U.S. corporate tax rate could
hurt the competitive position of U.S.
corporations relative to their foreign
peers, and therefore determined that
GILTI earned by such corporations
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
should be subject to a reduced effective
U.S. tax rate. See Senate Explanation, at
370. Accordingly, Congress enacted
section 250, which provides corporate
U.S. shareholders a deduction of 50
percent for taxable years beginning after
December 31, 2017, and before January
1, 2026, with respect to their GILTI, and
the amount treated as a dividend under
section 78 which is attributable to their
GILTI (‘‘section 78 gross-up’’). In
contrast, a domestic corporation’s
inclusion of its CFCs’ subpart F income
is not eligible for the section 250
deduction, and is therefore generally
subject to U.S. tax at the full corporate
rate.
After the Act, income earned directly
by a domestic corporation is subject to
a 21 percent rate. Absent a deduction
with respect to intangible income
attributable to foreign market activity
earned directly by a domestic
corporation, the lower effective tax rate
applicable to GILTI by reason of the
section 250 deduction would perpetuate
the pre-Act incentive for domestic
corporations to allocate intangible
income to CFCs formed in low- or zerotax jurisdictions. Therefore, to
neutralize the effect of providing a
lower U.S. effective tax rate with respect
to the active earnings of a CFC of a
domestic corporation through a
deduction for GILTI, section 250
provides a lower effective U.S. tax rate
with respect to ‘‘foreign-derived
intangible income’’ or ‘‘FDII’’ (a new
term created by the Act) earned directly
by the domestic corporation through a
deduction of 37.5 percent for taxable
years beginning after December 31,
2017, and before January 1, 2026. The
result of the section 250 deduction for
both GILTI and FDII is to help
neutralize the role that tax
considerations play when a domestic
corporation chooses the location of
intangible income attributable to
foreign-market activity, that is, whether
to earn such income through its U.S.based operations or through its CFCs.
The proposed regulations provide
guidance for determining the amount of
the section 250 deduction allowed to a
domestic corporation for its FDII and
GILTI. Proposed § 1.250(a)–1 provides
rules for determining the amount of the
deduction, including rules for applying
the taxable income limitation of section
250(a)(2). Proposed § 1.250(b)–1
provides general rules for computing a
domestic corporation’s FDII. Proposed
§ 1.250(b)–2 provides rules for
determining a domestic corporation’s
qualified business asset investment
(‘‘QBAI’’), which is a component of the
computation of FDII. Proposed
§ 1.250(b)–3 provides general rules for
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
determining gross income included in
gross foreign-derived deduction eligible
income (‘‘gross FDDEI’’), which is a
component of the computation of FDII.
Proposed § 1.250(b)–4 provides rules for
determining gross FDDEI from sales of
property. Proposed § 1.250(b)–5
provides rules for determining gross
FDDEI from the provision of a service.
Proposed § 1.250(b)–6 provides rules
relating to the sale of property or the
provision of a service to a related party.
II. Amount of Deduction Allowed Under
Section 250(a)
Proposed § 1.250(a)–1 provides
general rules to determine the amount of
a domestic corporation’s section 250
deduction and associated definitions
that apply for purposes of the proposed
regulations. The section 250 deduction
is available only to domestic
corporations. See section 250(a)(1) and
proposed § 1.250(a)–1(b)(1). For this
purpose, the term ‘‘domestic
corporation’’ has the meaning set forth
in section 7701(a)—an association, jointstock company, or insurance company
created or organized in the United
States or under the law of the United
States or of any State—but does not
include a regulated investment
company (as defined in section 851), a
real estate investment trust (as defined
in section 856), or an S corporation (as
defined in section 1361). See proposed
§ 1.250(a)–1(c)(1). The section 250
deduction is not available to individuals
except in certain cases where an
individual makes an election under
section 962. See part IV of this
Explanation of Provisions section for
more information about that provision.
As discussed in part I of this
Explanation of Provisions section, the
deduction under section 250 is
generally intended to reduce the
effective rate of U.S. income tax on FDII
and GILTI in order to help neutralize
the role that tax considerations play
when a domestic corporation chooses
the location of intangible income
attributable to foreign-market activity.
There is no indication that Congress
intended the section 250 deduction to
reduce the effective rate of tax imposed
by non-income tax provisions outside of
chapter 1 of the Internal Revenue Code.
Accordingly, for purposes of the excise
tax imposed by section 4940(a), the
proposed regulations provide that a
section 250 deduction is not treated as
an ordinary and necessary expense paid
or incurred for the production or
collection of gross investment income
within the meaning of section
4940(c)(3)(A). See proposed § 1.250(a)–
1(b)(4).
PO 00000
Frm 00003
Fmt 4701
Sfmt 4702
8189
The section 250 deduction is subject
to a taxable income limitation. If, for
any taxable year, the sum of a domestic
corporation’s FDII and GILTI exceeds its
taxable income, the excess is allocated
pro rata to reduce the corporation’s FDII
and GILTI solely for purposes of
computing the amount of the section
250 deduction. See section 250(a)(2) and
proposed § 1.250(a)–1(b)(2). For this
purpose, a domestic corporation’s
taxable income is determined without
regard to the section 250 deduction. See
section 250(a)(2)(A)(ii) and proposed
§ 1.250(a)–1(c)(4). The Code does not
otherwise define ‘‘taxable income’’ for
purposes of applying the taxable income
limitation of section 250(a)(2).
In general, a taxpayer’s taxable
income is based, in part, upon the
availability, and proper calculation, of
deductions. However, multiple Code
provisions simultaneously limit the
availability of a deduction based,
directly or indirectly, upon a taxpayer’s
taxable income, including sections
163(j)(1) (limiting a deduction for
business interest) and 172(a)(2) (limiting
a net operating loss deduction). Sections
163(j)(2) and 172(b) also provide that
any deduction not allowed to a taxpayer
for a taxable year by reason of the
limitation in section 163(j)(1) or
172(a)(2), respectively, may be allowed
to the taxpayer, subject to the same
limitation, in its succeeding taxable
year. A taxpayer’s net operating loss for
a taxable year is determined without
regard to the section 250 deduction (see
section 172(d)(9)), and a taxpayer’s
adjusted taxable income is determined
without regard to section 172. See
section 163(j)(8)(A)(iii). However,
neither section 163(j) nor section 250
prescribes an ordering rule with respect
to the other provision.
The Treasury Department and the IRS
considered proposing computations
requiring the use of simultaneous
equations in lieu of an ordering rule but
determined that an approach that
requires such computations would
result in undue administrative and
compliance burdens. Therefore, the
proposed regulations provide an
ordering rule for applying sections
163(j) and 172 in conjunction with
section 250 that the Treasury
Department and the IRS have
determined is consistent with the
statutory language for each provision.
Specifically, the proposed regulations
provide that a domestic corporation’s
taxable income for purposes of applying
the taxable income limitation of section
250(a)(2) is determined after all of the
corporation’s other deductions are taken
into account. See proposed § 1.250(a)–
1(c)(4). Accordingly, a domestic
E:\FR\FM\06MRP2.SGM
06MRP2
8190
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
corporation’s taxable income for
purposes of section 250(a)(2) is its
taxable income determined without
regard to section 250, but taking into
account the application of sections
163(j) and 172(a), including amounts
permitted to be carried forward to such
taxable year by reason of sections
163(j)(2) and 172(b).
Proposed regulations issued under
section 163(j) provide guidance on the
interaction of sections 163(j) and 250
that the Treasury Department and the
IRS consider to be consistent with these
proposed regulations under section 250.
See 83 FR 67490 (Dec. 28, 2018).
Specifically, the proposed regulations
under section 163(j) provide that, for
purposes of determining the limitation
under section 163(j), a deduction under
section 250(a)(1) that is properly
allocable to a non-excepted trade or
business is taken into account in
determining a taxpayer’s taxable income
and thus its adjusted taxable income.
See proposed § 1.163(j)–1(b)(37)(ii).
However, for this purpose, the
taxpayer’s deduction under section
250(a)(1) is determined without regard
to the limitations under sections
250(a)(2) and 163(j). See id.
As a result of these proposed
regulations under section 250 and the
proposed regulations under section
163(j), a domestic corporation’s
allowable business interest under
section 163(j), its net operating loss
deduction under section 172(a), and its
section 250 deduction are determined in
the following manner: First, a domestic
corporation computes the tentative
amount of its FDII and the tentative
amount of its section 250 deduction
(‘‘tentative section 250 deduction’’)
taking into account all deductions, but
without regard to any carryforwards or
disallowances under section 163(j), the
amount of any net operating loss
deduction under section 172(a), or the
taxable income limitation of section
250(a)(2) and proposed § 1.250(a)–
1(b)(2). Second, the corporation
computes the amount of its business
interest allowed after the application of
section 163(j), for this purpose taking
into account the amount of its tentative
section 250 deduction but without
regard to the amount of any net
operating loss deduction under section
172(a). See section 163(j)(8)(A)(iii) and
proposed § 1.163(j)–1(b)(1)(i)(B) and
(b)(37)(ii). Third, the corporation
computes the amount of its net
operating loss deduction under section
172(a), for this purpose taking into
account the amount of its business
interest allowed after application of
section 163(j) and the taxable income
limitation of section 172(a)(2), but
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
without regard to the amount of its
section 250 deduction (including its
tentative section 250 deduction). See
section 172(d)(9). Fourth, the
corporation computes the amount of its
FDII, for this purpose taking into
account the amount of its business
interest allowed after application of
section 163(j) and the amount of its net
operating loss deduction under section
172(a) (determined in steps two and
three, respectively). See part III(A)(2) of
this Explanation of Provisions section
for a discussion on the allocation of
deductions to gross DEI and gross
FDDEI. Fifth, the corporation computes
the amount of its section 250 deduction
after the application of the taxable
income limitation of section 250(a)(2)
and proposed § 1.250(a)–1(b)(2), for this
purpose taking into account the amount
of its business interest allowed after
application of section 163(j) and the
amount of its net operating loss
deduction under section 172(a). See
proposed § 1.250(a)–1(f)(2) (Example 2),
which illustrates the interaction of
sections 163(j), 172, and 250.
The Treasury Department and the IRS
request comments on the proposed
ordering rule, as well as how the section
250 deduction should be accounted for
in determining adjusted taxable income
at the partnership level under section
163(j)(4)(A).
III. Determination of FDII
A. General Computational Rules
1. In General
A domestic corporation’s FDII is the
corporation’s deemed intangible income
(‘‘DII’’) multiplied by the corporation’s
foreign-derived ratio. Proposed
§ 1.250(b)–1(b). A domestic
corporation’s DII is the excess (if any) of
the corporation’s deduction eligible
income (‘‘DEI’’) over its deemed tangible
income return (‘‘DTIR’’). Proposed
§ 1.250(b)–1(c)(3). A domestic
corporation’s DTIR is 10 percent of the
corporation’s QBAI. Proposed
§ 1.250(b)–1(c)(4). The foreign-derived
ratio is the domestic corporation’s ratio
of foreign-derived deduction eligible
income (‘‘FDDEI’’) to DEI. Proposed
§ 1.250(b)–1(c)(13).
2. Determination of DEI and FDDEI
A domestic corporation’s DEI is the
excess of its gross income without
regard to certain excluded items (‘‘gross
DEI’’) over the deductions properly
allocable to gross DEI. See proposed
§ 1.250(b)–1(c)(2). Gross DEI excludes
six categories of gross income: any
amount included in gross income under
section 951(a), GILTI, financial services
income, dividends from CFCs, domestic
PO 00000
Frm 00004
Fmt 4701
Sfmt 4702
oil and gas extraction income, and
foreign branch income. See proposed
§ 1.250(b)–1(c)(14). The proposed
regulations clarify that, for this purpose,
a dividend includes any amount treated
as a dividend under any other provision
of subtitle A of the Internal Revenue
Code, including the section 78 gross-up
attributable to inclusions under sections
951(a) and 951A(a). See proposed
§ 1.250(b)–1(c)(5). In addition, the
proposed regulations define foreign
branch income by reference to proposed
§ 1.904–4(f), except that it also includes
the sale, directly or indirectly, of any
asset (other than stock) that produces
gross income attributable to a foreign
branch, including by reason of the sale
of a disregarded entity or partnership
interest. See proposed § 1.250(b)–
1(c)(11). The result is that income from
the sale of any such asset is not
included in gross DEI.
For purposes of calculating the
foreign-derived ratio, FDDEI is the
excess of gross FDDEI over deductions
properly allocable to gross FDDEI. See
proposed § 1.250(b)–1(c)(12). The
proposed regulations define gross
FDDEI as the portion of a corporation’s
gross DEI that is derived from all of its
‘‘FDDEI sales’’ and ‘‘FDDEI services’’
(collectively, ‘‘FDDEI transactions’’). See
proposed § 1.250(b)–1(c)(8), (9), (10),
and (15). The determination of whether
a sale of property or a provision of a
service is a FDDEI sale or a FDDEI
service, respectively, is made under the
provisions of proposed §§ 1.250(b)–3
through 1.250(b)–6. See part III(B)
through (F) of this Explanation of
Provisions section. The portion of a
corporation’s gross DEI that is not gross
FDDEI is referred to as gross non-FDDEI.
See proposed § 1.250(b)–1(c)(16).
Therefore, all income included in gross
DEI is included in either gross FDDEI or
gross non-FDDEI, and all income
included in either gross FDDEI or gross
non-FDDEI is included in gross DEI.
In the case of property produced or
acquired for resale, gross income is
generally determined by subtracting cost
of goods sold from gross sales receipts.
In determining the amount of gross
income included in gross DEI or gross
FDDEI, cost of goods sold is attributed
to gross receipts with respect to gross
DEI and gross FDDEI using any
reasonable method. See proposed
§ 1.250(b)–1(d)(1). The proposed
regulations clarify that cost of goods
sold that is associated with activities
undertaken in an earlier taxable year
cannot be segregated into component
costs and attributed disproportionately
to amounts excluded from gross FDDEI
or to amounts excluded from gross DEI.
See id. This is similar to the
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
clarification in proposed § 1.199–
4(b)(2)(iii)(A) and is intended to
preclude a method that attributes cost of
goods sold of an inventory item to gross
receipts other than gross receipts
included in the computation of gross
DEI or gross FDDEI if the gross receipts
from the sale of that item are included
in the computation of amounts included
in the computation of gross DEI or gross
FDDEI, respectively. See 80 FR 51978,
51990 (Aug. 27, 2015). The Treasury
Department and the IRS request
comments on whether there are
alternative approaches for dealing with
timing issues, and whether additional
rules should be provided for attributing
cost of goods sold in determining gross
DEI and gross FDDEI. Cf. § 1.199–4(b)(2)
through (6).
Section 250(b)(3)(A) defines DEI as
the excess of a domestic corporation’s
gross income (excluding certain items)
over ‘‘the deductions (including taxes)
properly allocable to such gross
income.’’ FDDEI is defined as ‘‘any
deduction eligible income’’ of the
taxpayer generated through foreignmarket sales and services. See section
250(b)(4). Therefore, a taxpayer’s
deductions that are ‘‘properly allocable’’
to gross DEI and gross FDDEI must be
determined for purposes of calculating
its DEI and FDDEI. The statute does not
specify how deductions should be
allocated for purposes of determining
DEI and FDDEI. However, the rules set
forth in §§ 1.861–8 through 1.861–14T
and 1.861–17 apply for purposes of
several other provisions in the Code
which require the determination of
taxable income from specific sources or
activities, for example, for purposes of
determining the foreign tax credit
limitation under section 904 or qualified
production activities income under
former section 199. See generally
§§ 1.199–4 and 1.861–8(f)(1).
Accordingly, the proposed regulations
provide that the rules set forth in
§§ 1.861–8 through 1.861–14T and
1.861–17 apply for purposes of
determining DEI and FDDEI. See
proposed § 1.250(b)–1(d)(2)(i). In order
to avoid circularity, in applying those
rules for purposes of determining DEI
and FDDEI, the section 250 deduction is
not treated as giving rise to exempt
income or assets. See proposed § 1.861–
8(d)(2)(ii)(C)(4). Comments are
requested on whether alternative
approaches should be considered or
additional rules are needed for purposes
of allocating and apportioning a net
operating loss deduction to gross DEI
and gross FDDEI.
In certain circumstances, as a result of
expense apportionment or attribution of
cost of goods sold, a domestic
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
8191
corporation’s FDDEI could exceed its
DEI. For example, a domestic
corporation could have $80x of DEI and
$100x of FDDEI, with losses attributable
to domestic market sales accounting for
the $20x difference between DEI and
FDDEI. However, it would be
inconsistent with the statutory language
to treat a domestic corporation as having
a foreign-derived ratio in excess of one,
and therefore FDII in excess of DII. In
particular, section 250(b)(4) defines
FDDEI as a subset of DEI, that is, ‘‘any
deduction eligible income of such
taxpayer which is derived in connection
with’’ certain transactions. Therefore,
the proposed regulations clarify that the
foreign-derived ratio cannot exceed one.
See proposed § 1.250(b)–1(c)(13).
an increase in a domestic corporate
partner’s basis in a domestic partnership
under section 705(a)(1)(B) because some
of the partnership’s income may be
treated as exempt income by reason of
section 250. However, regardless of
whether the deduction gives rise to
exempt income in other contexts,
because the section 250 deduction is
computed and allowed solely at the
level of a domestic corporate partner,
the section 250 deduction does not
exempt the deducted income from tax
for purposes of applying section
705(a)(1)(B). As a result, a basis
adjustment to a domestic corporate
partner’s interest in a domestic
partnership is not appropriate to
account for a section 250 deduction.
3. Treatment of Partnerships
Section 250(a)(1) allows a deduction
to a domestic corporation, but does not
provide any rules for domestic
corporations that are partners in a
partnership. However, the conference
report accompanying the Act
(‘‘Conference Report’’) suggests that
Congress intended that a domestic
corporate partner of a partnership
receive the benefit of a section 250
deduction for its FDII and GILTI. See H.
Rept. 115–466, at 623, fn. 1517 (2017)
(Conf. Rep.) (‘‘The Committee intends
that the deduction allowed by new Code
section 250 be treated as exempting the
deducted income from tax. Thus, for
example, the deduction for global
intangible low-taxed income could give
rise to an increase in a domestic
corporate partner’s basis in a domestic
partnership under section
705(a)(1)(B).’’).
The proposed regulations give effect
to this legislative intent by adopting an
aggregate approach to partnerships for
determining a domestic corporate
partner’s FDII attributable to the income
and assets of a partnership. Specifically,
the proposed regulations provide that a
domestic corporate partner of a
partnership takes into account its
distributive share of a partnership’s
gross DEI, gross FDDEI, and deductions
in order to calculate the partner’s FDII.
See proposed § 1.250(b)–1(e)(1). In
addition, for purposes of determining a
domestic corporate partner’s DTIR, a
domestic corporation’s QBAI is
increased by its share of the
partnership’s adjusted basis in
partnership specified tangible property.
See proposed § 1.250(b)–2(g).
Under the proposed regulations, the
section 250 deduction is computed and
allowed solely at the level of a domestic
corporate partner. The Conference
Report in footnote 1517 suggests that the
section 250 deduction could give rise to
4. Treatment of Tax-Exempt
Corporations
PO 00000
Frm 00005
Fmt 4701
Sfmt 4702
A domestic corporation that is subject
to the unrelated business income tax
under section 511 may claim a section
250 deduction. However, the proposed
regulations clarify that such
corporation’s FDII for this purpose is
determined only with respect to the
corporation’s items of income, gain,
deduction, or loss, and adjusted bases in
property, that are taken into account in
computing its unrelated business
taxable income. See proposed
§ 1.250(b)–1(g). The proposed
regulations also clarify how a taxexempt corporation subject to the
unrelated business income tax under
section 511 computes the dual use ratio
with respect to property used in the
production of gross DEI and income that
is not gross DEI for purposes of
determining its QBAI. See id.
5. Determination of QBAI
Section 250(b)(2)(B) provides that
QBAI for purposes of section 250 is
defined under section 951A(d), and is
determined by substituting ‘‘deduction
eligible income’’ for ‘‘tested income’’
and without regard to whether the
corporation is a CFC. Accordingly, the
determination of QBAI for purposes of
FDII is similar to the determination of
QBAI for purposes of GILTI. Compare
proposed § 1.951A–3 with proposed
§ 1.250(b)–2. A domestic corporation’s
QBAI for FDII is equal to its aggregate
average adjusted bases in specified
tangible property, which is defined as
tangible property used in the production
of gross DEI. See proposed § 1.250(b)–
2(b) and (c). The proposed regulations
also provide rules for dual use property,
calculating QBAI in a short taxable year,
and calculating a domestic corporate
partner’s share of partnership QBAI. See
proposed § 1.250(b)–2(d), (f), and (g).
E:\FR\FM\06MRP2.SGM
06MRP2
8192
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
In order to prevent the avoidance of
the purposes of QBAI, the proposed
regulations disregard certain transfers of
specified tangible property by a
domestic corporation to a related party
where the corporation continues to use
the property in production of gross DEI.
See sections 250(c) and 951A(d)(4).
Specifically, for purposes of calculating
a domestic corporation’s QBAI, the
proposed regulations disregard a
transfer of specified tangible property by
the domestic corporation to a related
party (whose QBAI would not be taken
into account in calculating the
corporation’s DTIR) if, within a two-year
period beginning one year before the
transfer, the domestic corporation (or a
related party whose QBAI would be
taken into account in calculating the
corporation’s DTIR) leases the same or
substantially similar property from a
related party and such transfer and lease
occur pursuant to a principal purpose of
reducing the domestic corporation’s
DTIR. See proposed § 1.250(b)–2(h)(1)
and (h)(4)(i) through (iv). A transfer and
lease described in the preceding
sentence is treated per se as occurring
pursuant to a principal purpose of
reducing a domestic corporation’s DTIR
if both the transfer and the lease occur
within the same six-month period. See
proposed § 1.250(b)–2(h)(3). If the antiavoidance rule applies, the domestic
corporation that transferred the property
is treated as owning such property from
the later of the beginning of the term of
the lease or date of the transfer until the
earlier of the end of the term of the lease
or the end of the recovery period of the
transferred property. See proposed
§ 1.250(b)–2(h)(1).
The anti-avoidance rule does not
apply to a transfer to and lease from an
unrelated party, unless the transfer to
and lease from the unrelated party is
pursuant to a structured arrangement.
See proposed § 1.250(b)–2(h)(2). A
structured arrangement exists only if
either a reduction in the domestic
corporation’s DTIR is a material factor
in the pricing of the arrangement with
the transferee or, based on all the facts
and circumstances, the reduction in the
domestic corporation’s DTIR is a
principal purpose of the arrangement.
See id. The proposed regulations
provide a non-inclusive list of facts and
circumstances indicating that a
principal purpose of an arrangement is
the reduction of DTIR. See proposed
§ 1.250(b)–2(h)(2)(ii)(A) through (D).
The Treasury Department and the IRS
welcome comments on alternative
approaches to identifying a structured
arrangement involving unrelated
parties.
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
No inference is intended regarding the
application of any other Code section or
judicial doctrine that may apply to
affect the determination of FDII and its
components.
B. General Rules for FDDEI Transactions
1. Definitions of Sale, Foreign Person,
and United States
Proposed § 1.250(b)–3 provides rules
relevant to determining whether a sale
of property is a FDDEI sale and whether
a provision of a service is a FDDEI
service.
Section 250(b)(5)(E) provides that for
purposes of section 250(b), the term
‘‘sale’’ includes any lease, license,
exchange, or other disposition.
Accordingly, for purposes of
determining whether a sale of property
is a FDDEI sale, the proposed
regulations define ‘‘sale’’ to include a
lease, license, exchange, or other
disposition of property, including a
transfer of property resulting in gain or
an income inclusion under section 367.
See proposed § 1.250(b)–3(b)(7).
The proposed regulations define a
foreign person as a person that is not a
United States person, which includes a
foreign government or international
organization for purposes of the
proposed regulations. See proposed
§ 1.250(b)–3(b)(2). A United States
person (‘‘U.S. person’’) has the same
meaning as under section 7701(a)(30),
except that an individual that is a bona
fide resident of a U.S. territory within
the meaning of section 937(a) is
excluded. See proposed § 1.250(b)–
3(b)(10). While corporations formed in
U.S. territories are generally treated as
foreign corporations, under section
7701(a)(30), U.S. persons include all
U.S. citizens or residents, regardless of
whether they reside in a U.S. territory.
However, a bona fide resident of a U.S.
territory is generally exempt from U.S.
tax on income sourced in that territory.
See sections 931(a), 932(c)(4), 933(1),
and 935. Therefore, to prevent the
disparate treatment of sales to entities in
a U.S. territory (potentially qualifying as
a FDDEI sale) and sales to individuals
in a U.S. territory (not qualifying as a
FDDEI sale), the proposed regulations
exclude bona fide residents of a U.S.
territory from the definition of U.S.
person.
A partnership is generally a ‘‘person’’
for purposes of the Code. See section
7701(a)(1). Accordingly, in determining
whether a sale of property to or by a
partnership qualifies as a FDDEI sale, or
the provision of a service to or by a
partnership qualifies as a FDDEI service,
the proposed regulations treat a
partnership as a person. See proposed
PO 00000
Frm 00006
Fmt 4701
Sfmt 4702
§ 1.250(b)–3(g). Therefore, for example,
a sale of property to a foreign
partnership for a foreign use may
constitute a FDDEI sale because such
sale is to a foreign person, whereas a
sale of property to a domestic
partnership, even if for a foreign use,
will not constitute a FDDEI sale because
such sale is to a domestic person. The
Treasury Department and the IRS
request comments on whether there are
circumstances where it would be
appropriate to treat a partnership as an
aggregate of its partners for purposes of
determining whether a sale of property
or a provision of a service to a
partnership is a sale or service to a
foreign person.
The proposed regulations provide that
the term ‘‘United States’’ generally has
the meaning described in section
7701(a)(9). See proposed § 1.250(b)–
3(b)(9). However, with respect to mines,
oil and gas wells, and other natural
deposits, the term United States
includes certain seabed and subsoil of
submarine areas adjacent to the
territorial waters of the United States, as
described in section 638(1). See id.
2. Foreign Military Sales
The Treasury Department and the IRS
recognize that the statute is unclear as
to whether a sale of property or the
provision of a service to the U.S.
government for resale or on-service to a
foreign government under the Arms
Export Control Act of 1976, as amended
(22 U.S.C. 2751 et seq.), may qualify for
the section 250 deduction. In general,
the Arms Export Control Act governs
the export of certain sales and services
to foreign governments. Under the Arms
Export Control Act, a seller or service
provider provides sales or services to
the U.S. government that are for the
ultimate benefit of a foreign
government. The concern is that such
sale or service to the U.S. government
governed by the Arms Export Control
Act is not a sale to a ‘‘person who is not
a United States person’’ within the
meaning of section 250(b)(4)(A) or a
service to a ‘‘person not located within
the United States’’ within the meaning
of section 250(b)(4)(B), notwithstanding
that such a sale or service is ultimately
provided to the foreign government.
The proposed regulations provide
that, for purposes of section 250, a sale
of property or the provision of a service
to the U.S. government under the Arms
Export Control Act of 1976 is treated as
a sale of property or provision of a
service to a foreign government. See
proposed § 1.250(b)–3(c). See part
I(D)(3) of the Special Analyses section
for additional discussion regarding the
analysis for the adoption of this rule. As
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
discussed in part III(B)(1) of this
Explanation of Provisions section, a
foreign government or international
organization is a foreign person for
purposes of section 250 and the
proposed regulations. See proposed
§ 1.250(b)–3(b)(2). Therefore, a sale of
property or provision of a service to the
U.S. government under the Arms Export
Control Act may qualify as a FDDEI
transaction if the other requirements
under proposed §§ 1.250(b)–3 through
1.250(b)–6 are satisfied. To the extent
other requirements under proposed
§§ 1.250(b)–3 through 1.250(b)–6 are not
satisfied, a sale or service will not
qualify as a FDDEI transaction
regardless of whether such sale or
service is pursuant to the Arms Export
Control Act.
The Treasury Department and the IRS
have not currently identified readily
available documentation sufficient to
demonstrate that a particular sale or
service was made pursuant to the Arms
Export Control Act. Comments are
requested on whether final regulations
should provide guidance on how
taxpayers can demonstrate that a sale or
service has been made pursuant to the
Arms Export Control Act.
3. Knowledge and Reason To Know
As discussed in part III(C) of this
Explanation of Provisions section, the
proposed regulations provide that a sale
of property qualifies as a FDDEI sale
only if the seller or renderer does not
know or have reason to know that the
recipient is not a foreign person or that
the property will not be for a foreign
use. See proposed § 1.250(b)–4(c), (d),
and (e). In addition, as discussed in part
III(D) of this Explanation of Provisions
section, the proposed regulations
provide that the provision of a general
service (as defined in proposed
§ 1.250(b)–5(c)(4)) qualifies as a FDDEI
service only if the renderer of the
service does not know or have reason to
know that the recipient is located
within the United States. See proposed
§ 1.250(b)–5(d)(1) and (e)(1). The terms
‘‘know’’ and ‘‘reason to know’’ are used
throughout the Code and Treasury
regulations. The Treasury Department
and the IRS request comments regarding
whether definitions of ‘‘know’’ and
‘‘reason to know’’ are necessary for
purposes of the section 250 regulations.
4. Reliability of Documentation
In order for a transaction to constitute
a FDDEI transaction, the proposed
regulations prescribe different types of
documentation that are required to be
obtained for each type of transaction.
For example, in the case of a sale of
property, the seller must obtain
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
documentation that establishes the
recipient’s status as a foreign person.
See proposed § 1.250(b)–4(c)(2). See
parts III(C) and III(D) of this Explanation
of Provisions section for an explanation
of the documentation requirements in
these proposed regulations; see also part
II of the Special Analyses section for a
discussion of the Paperwork Reduction
Act.
The proposed regulations provide
that, for any documentation described
in the proposed regulations to be relied
upon, the seller or renderer must obtain
the documentation by the FDII filing
date, the documentation must be
obtained no earlier than one year before
the sale or service, and the seller or
renderer must not know or have reason
to know that the documentation is
incorrect or unreliable. See proposed
§ 1.250(b)–3(d); see also proposed
§ 1.250(b)–3(b)(1) (defining the term
‘‘FDII filing date’’). For this purpose, a
seller or renderer has reason to know
that documentation is unreliable or
incorrect if its knowledge of all the
relevant facts or statements contained in
the documentation is such that a
reasonably prudent person in the
position of the seller or renderer would
question the accuracy of the
documentation. See proposed
§ 1.250(b)–3(d)(1).
The Treasury Department and the IRS
welcome comments on the
documentation requirements in the
proposed regulations.
5. Transactions Consisting of Both Sales
and Services
Under section 250(b)(4) and (5) and
these proposed regulations, the criteria
for establishing that a transaction is
foreign-derived is different for sales and
services. For example, a transaction
with a U.S. person that is located
outside of the United States may qualify
as a FDDEI service, but cannot qualify
as a FDDEI sale. Because a transaction
might include elements of both a sale
and a service, the proposed regulations
clarify that a transaction is classified
according to the overall predominant
character of the transaction. See
proposed § 1.250(b)–3(e). For example, a
sale of equipment that includes
incidental support services from the
seller at no additional cost would be
classified as a sale, and therefore the
provisions of proposed § 1.250(b)–4
would apply to determine whether gross
income from the transaction is included
in gross FDDEI.
6. Special Rule for Certain Loss
Transactions
A domestic corporation’s FDDEI
includes all gross income included in
PO 00000
Frm 00007
Fmt 4701
Sfmt 4702
8193
gross DEI that is derived from FDDEI
sales and FDDEI services in a taxable
year, reduced by the amount of
deductions properly allocable to such
income. See proposed § 1.250(b)–
1(c)(12) and part III(A)(2) of this
Explanation of Provisions section. In
most cases, a FDDEI sale or FDDEI
service will increase a domestic
corporation’s section 250 deduction,
because the income from such sale or
service will increase the corporation’s
FDDEI and thus its foreign-derived ratio.
However, in some cases, a FDDEI sale or
a FDDEI service could have the effect of
reducing FDDEI and thus a domestic
corporation’s section 250 deduction for
the year. This could happen where, for
instance, the domestic corporation’s
cost of goods sold attributed to property
sold in a FDDEI sale exceeds its gross
receipts from the sale, or the expenses
allocated to the gross income from a
FDDEI sale or FDDEI service exceed the
gross income arising from the sale or
service. In such a case, absent a rule to
the contrary, a domestic corporation
could intentionally fail to satisfy the
documentation requirements with
respect to a transaction that would
otherwise qualify as a FDDEI sale or
FDDEI service in order to prevent the
transaction from reducing its FDDEI and
thereby its section 250 deduction.
Section 250(b) does not contemplate a
transaction-by-transaction
determination of FDII, but rather an
aggregate calculation based on all gross
income ‘‘which is derived in connection
with’’ sales and services described in
section 250(b)(4). Therefore, it would be
inappropriate to permit taxpayers to
elect to exclude losses related to sales to
foreign persons for a foreign use and
services to persons located outside the
United States by merely failing the
documentation requirements.
Accordingly, the proposed regulations
provide that if a seller or renderer
knows or has reason to know that
property is sold to a foreign person for
a foreign use or a general service is
provided to a person located outside the
United States, but the seller or renderer
does not satisfy the documentation
requirements applicable to such sale or
service, the sale of property or provision
of a service is nonetheless deemed a
FDDEI transaction if treating the sale or
service as a FDDEI transaction would
reduce a domestic corporation’s FDDEI.
See proposed § 1.250(b)–3(f).
The special loss transaction rule in
proposed § 1.250(b)–3(f) does not apply
to proximate services, property services,
and transportation services, each of
which is defined and discussed in part
III(D)(3) through (5) of this Explanation
of Provisions section, because the
E:\FR\FM\06MRP2.SGM
06MRP2
8194
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
proposed regulations do not require
documentation with respect to such
services. Therefore, a proximate service,
property service, or transportation
service is a FDDEI service if it meets the
applicable substantive requirements for
a FDDEI service described in § 1.250(b)–
5(f), (g), and (h), respectively.
C. FDDEI Sales
1. In General
Section 250(b)(4)(A) provides that
FDDEI includes income from property
the taxpayer sells to any person who is
not a U.S. person, and which the
taxpayer establishes to the satisfaction
of the Secretary is for a foreign use.
Accordingly, the proposed regulations
define a FDDEI sale as a sale of property
to a foreign person for a foreign use. See
proposed § 1.250(b)–4(b).
2. Foreign Person
The proposed regulations provide that
a recipient is treated as a foreign person
only if the seller obtains documentation
of the recipient’s foreign status and does
not know or have reason to know that
the recipient is not a foreign person. See
proposed § 1.250(b)–4(c)(1). The
proposed regulations provide several
types of permissible documentation for
this purpose, such as a written
statement by the recipient indicating
that the recipient is a foreign person.
See proposed § 1.250(b)–4(c)(2)(i). To
alleviate the burden of documentation
on small businesses and small
transactions, the proposed regulations
allow a seller that has less than
$10,000,000 of gross receipts in the
prior taxable year, or less than $5,000 in
gross receipts from a single recipient
during the current taxable year, to treat
a recipient as a foreign person if the
seller has a shipping address for the
recipient that is outside the United
States. See proposed § 1.250(b)–
4(c)(2)(ii). The $10,000,000 and $5,000
thresholds were chosen based on the
experience of the Treasury Department
and the IRS and not based on any
specific quantitative analysis. The
Treasury Department and the IRS
request comments regarding whether
the $10,000,000 and $5,000 thresholds
are appropriate and especially solicit
comments that provide data, other
evidence, and models that can enhance
the rigor of the process by which such
thresholds are determined.
3. Foreign Use
Under the proposed regulations, the
rules applicable to the determination of
whether a sale of property is for a
foreign use depends on whether the
property sold is ‘‘general property’’ or
‘‘intangible property.’’ See proposed
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
§ 1.250(b)–4(d) and (e). The proposed
regulations define general property as
property other than intangible property,
a security (as defined in section
475(c)(2)), or a commodity (as defined
in section 475(e)(2)(B) through (D)). See
proposed § 1.250(b)–3(b)(3). The
proposed regulations define intangible
property by cross-reference to section
367(d)(4). See proposed § 1.250(b)–
3(b)(4).
The proposed regulations provide that
a sale of a security (as defined in section
475(c)(2)) or a commodity (as defined in
section 475(e)(2)(B) through (D)) is not
a FDDEI sale because such financial
instruments are not subject to ‘‘any use,
consumption, or disposition’’ outside
the United States within the meaning of
section 250(b)(5)(A). See proposed
§ 1.250(b)–4(f).
The proposed regulations provide that
a sale of property (whether general
property or intangible property) is
treated as for a foreign use only if the
seller obtains documentation that the
property is for a foreign use and does
not know or have reason to know, as of
the FDII filing date, that the property is
not for a foreign use (or, in the case of
intangible property, that the portion of
the sale of the intangible property for
which the seller establishes foreign use
is not for a foreign use). See proposed
§ 1.250(b)–4(d)(1) and (e)(1).
Accordingly, if, as of the FDII filing
date, the seller does not know or have
reason to know that either the
documentation obtained with respect to
the sale is not reliable or that the
property is not for a foreign use within
the meaning of § 1.250(b)–4(d)(2) or
(e)(2), then the sale of the property is
treated as for a foreign use under
§ 1.250(b)–4(d)(1) or (e)(1) even if, in
fact, the sale of such property is not for
a foreign use within the meaning of
§ 1.250(b)–4(d)(2) or (e)(2).
a. Foreign Use for General Property
The sale of general property is for a
foreign use if either the property is not
subject to domestic use within three
years of delivery of the property or the
property is subject to manufacture,
assembly, or other processing outside
the United States before any domestic
use of the property. See proposed
§ 1.250(b)–4(d)(2)(i) and Conf. Rep. at
625, fn. 1522 (‘‘If property is sold by a
taxpayer to a person who is not a U.S.
person, and after such sale the property
is subject to manufacture, assembly, or
other processing (including the
incorporation of such property, as a
component, into a second product by
means of production, manufacture, or
assembly) outside the United States by
such person, then the property is for a
PO 00000
Frm 00008
Fmt 4701
Sfmt 4702
foreign use.’’). Domestic use is defined
as the use, consumption, or disposition
of property within the United States,
including manufacture, assembly, or
other processing within the United
States. See proposed § 1.250(b)–
4(d)(2)(ii). Comments are requested on
the supply chain implications of these
rules.
General property is subject to
manufacturing, assembly, or other
processing only if it meets either of the
following two tests: (1) There is a
physical and material change to the
property, or (2) the property is
incorporated as a component into a
second product. See proposed
§ 1.250(b)–4(d)(2)(iii)(A). The proposed
regulations clarify that a physical and
material change does not include
‘‘minor assembly, packaging, or
labeling.’’ See proposed § 1.250(b)–
4(d)(2)(iii)(B). However, whether
property has undergone a physical and
material change (as opposed to minor
assembly, packaging, or labeling) is
determined based on all the relevant
facts and circumstances. The Treasury
Department and the IRS request
comments regarding whether additional
guidance should be provided for
determining whether property has
undergone a physical and material
change.
General property is incorporated as a
component into a second product only
if the fair market value of the property
when it is delivered to the recipient
constitutes no more than 20 percent of
the fair market value of the second
product, determined when the second
product is completed. See proposed
§ 1.250(b)–4(d)(2)(iii)(C). If the seller
sells multiple items of property that are
incorporated into the second product,
an aggregation rule treats all of the
property sold by the seller that is
incorporated into the second product as
a single item of property for purposes of
determining whether the property
constitutes more than 20 percent of the
fair market value of the second product.
See id.
In order to establish that general
property is for a foreign use, the seller
must generally obtain documentation
with respect to the sale. See proposed
§ 1.250(b)–4(d)(3). Such documentation
could include, for example, proof of
shipment of the property to a foreign
address. See proposed § 1.250(b)–
4(d)(3)(i). However, in the case of
certain small businesses and small
transactions, the seller may rely on a
foreign shipping address for the
recipient instead of obtaining
documentation. See proposed
§ 1.250(b)–4(d)(3)(ii).
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
In lieu of the general documentation
requirements for determining foreign
use for sales of general property, in the
case of a sale of multiple items of
general property, which because of their
fungible nature cannot reasonably be
specifically traced to the location of use
(‘‘fungible mass’’), a seller may establish
that some, but not all, of the property is
for a foreign use through market
research, including statistical sampling,
economic modeling, and other similar
methods. See proposed § 1.250(b)–
4(d)(3)(iii). A de minimis rule applies to
treat the entire fungible mass as for a
foreign use if a seller obtains
documentation establishing that 90
percent or more of the fungible mass is
for a foreign use. See id. Conversely, no
portion of the fungible mass is treated
as for a foreign use if the seller does not
obtain documentation establishing that
10 percent or more of the fungible mass
is for a foreign use. Id.
A special rule applies for purposes of
determining whether the sale of certain
transportation property is for a foreign
use, which takes into account the
special nature of property used for
international transportation.
Specifically, the sale of aircraft, railroad
rolling stock, vessel, motor vehicle, or
similar property that provides a mode of
transportation and is capable of
traveling internationally is for a foreign
use only if, during the three-year period
from the date of delivery of the
property, the property is located outside
the United States more than 50 percent
of the time and more than 50 percent of
the miles traversed in the use of such
property will be traversed outside the
United States. See proposed § 1.250(b)–
4(d)(2)(iv). The seller can establish that
a sale of general property used for
international transportation is for a
foreign use through, for example, a
written statement from the recipient that
the property is anticipated to satisfy the
test described in the preceding sentence.
See proposed § 1.250(b)–4(d)(3)(i)(A).
b. Foreign Use for Intangible Property
As discussed in part III(B) of this
Explanation of Provisions section, a sale
includes a license and any transfer of
property in which gain or income is
recognized under section 367, including
a transfer of intangible property subject
to section 367(d). See proposed
§ 1.250(b)–3(b)(7). The proposed
regulations provide that a sale of
intangible property is for a foreign use
to the extent revenue is earned from
exploiting the intangible property
outside the United States, the
documentation requirements are
satisfied, and the seller does not know
or have reason to know that the portion
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
of the sale of the intangible property for
which the seller establishes foreign use
is not for a foreign use. See proposed
§ 1.250(b)–4(e)(1). Unlike a sale of
general property (other than a sale of a
fungible mass), a seller may establish
foreign use for a portion of the income
from the sale of intangible property. For
purposes of determining whether a sale
of intangible property is for a foreign
use, the location where revenue is
earned is generally determined based on
the location of end-user customers
licensing the intangible property or
purchasing products for which the
intangible property was used in
development, manufacture, sale, or
distribution. See proposed § 1.250(b)–
4(e)(2). This determination is generally
made on an annual basis based on the
actual revenue earned by the recipient.
Id.
Special rules apply to lump sum sales
because, in these cases, it may be
difficult or impossible to know the
location where revenue will be
generated when the sale occurs. The
determination of foreign use in these
cases is made based on the net present
value of revenue the seller would have
reasonably expected to earn from the
exploitation of the intangible property.
See proposed § 1.250(b)–4(e)(2)(iii). For
sales of rights to intangible property for
use both within and outside the United
States, the seller must establish the
proportionate amount of revenue earned
within and outside the United States
from use of the intangible property to
establish foreign use. The proposed
regulations describe documentation that
can be used to establish where revenue
is earned from use of the intangible
property. See proposed § 1.250(b)–
4(e)(3)(i). For example, if a domestic
corporation licenses to a foreign person
the worldwide rights to market and sell
an item protected by a copyright, the
domestic corporation would need to
obtain documentation, as provided in
the proposed regulations, establishing
where revenue is earned from sales of
the copyright-protected item.
A seller may establish the extent to
which a sale of intangible property for
a lump sum is for a foreign use through
documentation containing reasonable
projections of the amount and location
of revenue that the seller would have
reasonably expected to earn from the
use of intangible property. See proposed
§ 1.250(b)–4(e)(3)(iii). To be considered
reasonable, the net present value must
be consistent with the financial data and
projections used by the seller to
determine the sales price to the foreign
person. See id. The same rule for
documentation applies to a sale to a
foreign person (other than a related
PO 00000
Frm 00009
Fmt 4701
Sfmt 4702
8195
party of the seller) for annual payments
that are not contingent on revenue or
profit unless the seller has access to
reliable information to determine the
actual revenue earned by the foreign
unrelated party from the exploitation of
the intangible property. See proposed
§ 1.250(b)–4(e)(3)(ii).
As discussed in part III(C)(3)(a) of this
Explanation of Provisions section, a sale
of general property is treated as for a
foreign use if the property is subject to
manufacturing, assembly, or other
processing outside the United States.
See proposed § 1.250(b)–4(d)(2)(i)(B).
This rule is based on footnote 1522 of
the Conference Report, which provides
that ‘‘[i]f property is sold by a taxpayer
to a person who is not a U.S. person,
and after such sale the property is
subject to manufacture, assembly, or
other processing (including the
incorporation of such property, as a
component, into a second product by
means of production, manufacture, or
assembly) outside the United States by
such person, then the property is for a
foreign use.’’ Intangible property is not
‘‘subject to’’ manufacture, assembly, or
processing, and there is no other
discussion in the Conference Report that
indicates an intent to provide an
analogous rule for intangible property
otherwise used in the manufacturing
process. However, comments are
requested on whether a rule for
intangible property similar to proposed
§ 1.250(b)–4(d)(2)(i)(B) is appropriate.
Comments are also requested on what
additional rules may be needed for
determining the location of revenue
generation from end-users and what
types of documentation should be
accepted to document the location of
revenue generation with respect to
intangible property.
D. FDDEI Services
1. In General
Section 250(b)(4)(B) provides that
FDDEI includes income from services
provided by a domestic corporation to
any person, or with respect to property,
not located within the United States.
Section 250 does not prescribe rules for
determining whether a person or
property is ‘‘not located within the
United States.’’ Proposed § 1.250(b)–5
provides rules for determining whether
a service is provided to a person, or
with respect to property, located outside
the United States.
Under the proposed regulations,
whether a service is provided to a
person, or with respect to property,
located outside the United States,
depends on the type of service provided
and, in the case of a general service
E:\FR\FM\06MRP2.SGM
06MRP2
8196
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
(defined below), the type of recipient of
the service. The proposed regulations
distinguish between services where the
service provider (the ‘‘renderer’’) and
the recipient are in physical proximity
when the service is performed
(‘‘proximate services’’), services with
respect to tangible property (‘‘property
services’’), services to transport people
or property (‘‘transportation services’’),
and all other services (‘‘general
services’’). See proposed § 1.250(b)–5(b)
and (c)(4) through (7). For purposes of
determining whether a service
constitutes a FDDEI service, the
proposed regulations look to the
location of the performance of the
service for proximate services, the
location of the property for property
services, the origin and destination of
transportation services, and the location
of the recipient for general services. See
proposed § 1.250(b)–5(d) through (h).
Each category of service described in
§ 1.250(b)–5 is mutually exclusive of
each other category, and every possible
service is described in a single category.
Therefore, whether a service is a FDDEI
service is determined under the rules
relevant to one, and only one, category
of service described in § 1.250(b)–5. For
example, a general service that is
provided to a recipient located within
the United States is not a FDDEI service,
even if the service is performed outside
the United States, whereas a property
service that is performed outside the
United States is a FDDEI service, even
if the recipient of the service is located
within the United States. See parts
III(D)(2) and (4) of this Explanation of
Provisions section.
2. General Services to Persons Located
Outside the United States
A general service is a service other
than a proximate service, a property
service, or a transportation service. See
proposed § 1.250(b)–5(c)(4). General
services is the residual category of
services. Accordingly, a service that is
not a property service, a transportation
service, or a proximate service is
analyzed as a general service.
For general services, the proposed
regulations distinguish between services
provided to ‘‘consumers’’ and services
provided to ‘‘business recipients.’’ A
consumer is defined as an individual
that purchases a service for personal
consumption. See proposed § 1.250(b)–
5(c)(3). A business recipient is defined
as any recipient other than a consumer.
See proposed § 1.250(b)–5(c)(2). In both
cases, general services are treated as
provided to a person located outside the
United States if the renderer does not
know or have reason to know that the
consumer or business recipient is
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
located within the United States and
obtains appropriate documentation. See
proposed § 1.250(b)–5(d)(1) and (e)(1).
a. General Services to Consumers
The provision of a general service to
a consumer located outside the United
States is a FDDEI service. See proposed
§ 1.250(b)–5(b)(1). The proposed
regulations provide that the consumer is
located where a consumer resides when
the service is provided. See proposed
§ 1.250(b)–5(d)(2).
The proposed regulations require a
domestic corporation to document the
location of the consumer. See proposed
§ 1.250(b)–5(d)(1) and (3). The proposed
regulations provide several types of
permissible documentation for this
purpose, including a written statement
by the consumer indicating the
residence of the consumer when the
service is provided. See proposed
§ 1.250(b)–5(d)(3)(i). However, in the
case of certain small businesses and
small transactions, the renderer may
rely on a foreign billing address for the
consumer instead of obtaining
documentation. See proposed
§ 1.250(b)–5(d)(3)(ii).
b. General Services to Business
Recipients
The provision of a general service to
a business recipient located outside the
United States is a FDDEI service. See
proposed § 1.250(b)–5(b)(2). Under the
proposed regulations, all general
services that are not provided to
consumers are treated as services
provided to business recipients,
regardless of whether the recipient is
engaged in a trade or business. See
proposed § 1.250(b)–5(c)(2).
The proposed regulations determine
the location of a business recipient
based on the location of the business
recipient’s operations, and the
operations of any related party of the
recipient, that receive a benefit (as
defined in § 1.482–9(l)(3)) from such
service. See proposed § 1.250(b)–5(e)(2)
and (4). For purposes of this
determination, the location of residence,
incorporation, or formation of a
business recipient is not relevant. For
example, a general service that confers
a benefit only on the U.S. operations of
a foreign person will generally not
qualify as a FDDEI service, whereas a
service that confers a benefit only on the
foreign operations of a U.S. person will
generally qualify as a FDDEI service. For
purposes of this rule, a business
recipient is treated as having operations
in any location where it maintains an
office or other fixed place of business.
See proposed § 1.250(b)–5(e)(2)(ii).
PO 00000
Frm 00010
Fmt 4701
Sfmt 4702
The proposed regulations provide that
a service is generally provided to a
business recipient located outside the
United States to the extent that the
renderer’s gross income from providing
the service is allocated to the business
recipient’s operations outside the
United States. See proposed § 1.250(b)–
5(e)(2)(i). To make this allocation, the
renderer must first determine which of
the business recipient’s operations
receive a benefit from the service. See
proposed § 1.250(b)–5(e)(2)(i)(A). Where
the service confers a benefit on the
operations of the business recipient in
specific locations, gross income of the
renderer is allocated based on the
location of the operations in specific
locations that receive the benefit. See id.
Where a service confers a benefit on the
recipient’s business as a whole, or
where reliable information about the
particular portion of the operations that
specifically receive a benefit from the
service is unavailable, the proposed
regulations provide that the service is
deemed to confer a benefit on all of the
business recipient’s operations. See id.
The renderer then must allocate its gross
income from providing the service
between the operations that receive a
benefit from the service that are located
within and outside the United States.
See proposed § 1.250(b)–5(e)(2)(i)(B).
For this purpose, any reasonable
method may be used, and the principles
of § 1.482–9(k) apply to determine
whether a method is reasonable. See id.
A reasonable method may include, for
example, an allocation based on the
renderer’s time spent working with
different offices of the business
recipient or publicly available
information about the business
recipient’s revenue from different
markets. See id. The Treasury
Department and the IRS request
comments on this approach for
determining the location of a business
recipient that operates both within and
outside of the United States.
The proposed regulations also require
a domestic corporation to obtain
documentation sufficient to establish
the location of a business recipient’s
operations that benefit from the service.
See proposed § 1.250(b)–5(e)(1) and (3).
A domestic corporation may obtain a
statement from the recipient specifying
the location of the operations that will
benefit from the service or include a
similar statement in a binding contract.
See proposed § 1.250(b)–5(e)(3)(i)(A)
and (B). A domestic corporation may
also establish the location of the
business recipient using information
provided in the ordinary course of the
provision of a service or publicly
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
available information. See proposed
§ 1.250(b)–5(e)(3)(i)(C) and (D).
However, in the case of certain small
businesses and small transactions, the
renderer may rely on a foreign billing
address for the business recipient
instead of obtaining documentation. See
proposed § 1.250(b)–5(e)(3)(ii).
3. Proximate Services
The provision of a proximate service
to a recipient located outside the United
States is a FDDEI service. See proposed
§ 1.250(b)–5(b)(3). A proximate service
is defined as a service, other than a
property service or a transportation
service, substantially all of which is
performed in the physical presence of
the recipient or, in the case of a business
recipient, its employees. See proposed
§ 1.250(b)–5(c)(6). For example, a
training, consulting, or auditing service
that is performed on-site would
generally constitute a proximate service.
Substantially all of a service is
performed in the physical presence of
the recipient or its employees if the
renderer spends more than 80 percent of
the time providing the service in the
physical presence of the recipient or its
employees. See proposed § 1.250(b)–
5(c)(6). The recipient of a proximate
service is treated as located where the
service is performed. See proposed
§ 1.250(b)–5(f). If a proximate service is
performed partly within and partly
outside the United States, a
proportionate amount of the service is
treated as rendered to a person located
outside the United States corresponding
to the portion of time spent providing
the proximate service outside the
United States. See id.
4. Property Services
The provision of a property service
with respect to tangible property located
outside the United States is a FDDEI
service. See proposed § 1.250(b)–5(b)(4).
A property service is defined as a
service, other than a transportation
service, provided with respect to
tangible property, but only if
substantially all of the service is
performed at the location of the
property and results in physical
manipulation of the property such as
through assembly, maintenance, or
repair. See proposed § 1.250(b)–5(c)(5).
The proposed regulations provide that
substantially all of a service is
performed at the location of property if
the renderer spends more than 80
percent of the time providing the service
at or near the location of the property.
See id. A property service is a FDDEI
service only if the tangible property
with respect to which the service is
performed is located outside the United
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
States for the duration of the period of
performance. See proposed § 1.250(b)–
5(g). The Treasury Department and the
IRS request comments on whether to
consider an exception for property that
is located in the United States
temporarily solely for purposes of the
performance of certain services, such as
maintenance or repairs. As discussed in
part III(E) of this Explanation of
Provisions section, a property service
may qualify as a FDDEI service even if
it is performed for a person located
within the United States.
Other services that relate to property
but may not necessarily be provided in
close proximity to tangible property or
do not result in the physical
manipulation of such property such as
through assembly, maintenance, or
repair may be subject to the rules for
proximate services, transportation
services, or general services. For
example, an architectural or engineering
service that is not performed in physical
proximity to the property or the
recipient will be evaluated as a general
service even if the service relates to
property located outside the United
States, and thus whether such a service
is a FDDEI service will be determined
based on the location of the recipient
rather than the location of the property.
5. Transportation Services
The provision of a transportation
service to a recipient, or with respect to
property, located outside the United
States is a FDDEI service. See proposed
§ 1.250(b)–5(b)(5). A transportation
service is defined as a service to
transport a person or property using any
mode of transportation (such as an
airplane). See proposed § 1.250(b)–
5(c)(7).
Basing the location of a transportation
service on the residence of the recipient
of the transportation service could
provide inconsistent results with
respect to similar services. Similarly,
providing different rules for the
transportation of a person or property
could provide inconsistent results with
respect to similar services. Therefore,
the proposed regulations provide that
whether a ‘‘transportation service’’ is
provided to a recipient, or with respect
to property, located outside the United
States is determined based on the origin
and destination of the service. See
proposed § 1.250(b)–5(h). If both the
origin and destination of a
transportation service are outside of the
United States, then the service is a
FDDEI service. See id. If either the
origin or the destination of the
transportation service is outside of the
United States, but not both, then 50
percent of the service is a FDDEI service
PO 00000
Frm 00011
Fmt 4701
Sfmt 4702
8197
and thus 50 percent of the gross income
from the provision of the service is
included in the renderer’s gross FDDEI.
See id.
E. Domestic Intermediary Rules
Section 250(b)(5)(B) describes special
rules for ‘‘domestic intermediaries’’ (the
‘‘domestic intermediary rules’’). Section
250(b)(5)(B)(i) provides that if a seller
sells property to another person (other
than a related party) for further
manufacture or other modification
within the United States, the property is
not treated as sold for a foreign use even
if such other person subsequently uses
such property for a foreign use. Section
250(b)(5)(B)(ii) provides that services
provided to a person (other than a
related party) located within the United
States are not treated as services
described in section 250(b)(4)(B) even if
such other person uses such services in
providing services that are described in
section 250(b)(4)(B).
The proposed regulations do not
contain specific rules corresponding to
the domestic intermediary rules because
those rules are encompassed within the
general rules relating to FDDEI sales and
FDDEI services in the proposed
regulations. With respect to sales of
property, the proposed regulations
provide that general property is not for
a foreign use if, before being subject to
manufacture, assembly, or other
processing outside the United States,
the property is subject to a domestic
use. See proposed § 1.250(b)–4(d)(2)(i).
For this purpose, domestic use includes
manufacture, assembly, or other
processing within the United States. See
proposed § 1.250(b)–4(d)(2)(ii)(B). In
addition, a sale of property to a U.S.
person cannot qualify as a FDDEI sale
under any circumstance. See section
250(b)(4)(A) and proposed § 1.250(b)–
4(b). Therefore, a sale of property to a
foreign person for further manufacture
in the United States or to a U.S. person
does not qualify for a FDDEI sale,
regardless of the ultimate use of the
property by the recipient.
With respect to the provision of
services, the proposed regulations
provide that a service is a FDDEI service
only if the recipient of the service, or
the property to which the service
relates, is located outside the United
States. See proposed § 1.250(b)–5(b)(1)
through (5). Therefore, a service
provided to a person, or with respect to
property, located within the United
States is not a FDDEI service, regardless
of the ultimate use of the service by the
recipient.
Section 250(b)(5)(B)(ii) could be read
literally to provide that a FDDEI service
includes only services provided to a
E:\FR\FM\06MRP2.SGM
06MRP2
8198
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
person not located within the United
States, in which case a service provided
‘‘with respect to property located
outside the United States’’ would not
qualify as a FDDEI service if the
recipient of such service was located
within the United States. As discussed
in part III(D) of this Explanation of
Provisions section, consistent with the
general rule of section 250(b)(4)(B), the
proposed regulations clarify that a
service qualifies as a FDDEI service if it
is provided either to a person located
outside the United States or with
respect to property located outside the
United States. The Treasury Department
and the IRS have determined that an
interpretation of section 250(b)(5)(B)(ii)
that effectively eliminates the
disjunctive test of section 250(b)(4)(B)
would not be reasonable. Therefore,
under the proposed regulations,
whether a service that is treated as with
respect to property—a property service
or a transportation service—is a FDDEI
service is determined solely by
reference to the location of the property,
and not the location of the recipient. See
proposed § 1.250(b)–5(g) and (h).
Finally, the parenthetical references
to related parties in the domestic
intermediary rules could be read to
imply the existence of an exception for
further manufacture or modification in
the United States by a related party or
a service provided to a related party
located within the United States.
However, the general rules of section
250(b)(4)(A) and (B) do not authorize
such exceptions, and the domestic
intermediary rules do not purport to
expand these general rules, but rather to
limit the transactions that qualify under
them. Therefore, with respect to related
party domestic intermediaries, the
proposed regulations do not provide an
exception to the general rule that
property must be sold to a foreign
person to qualify as a FDDEI sale or that
a service must be provided to a person
located outside the United States to
qualify as a FDDEI service. Cf. part V of
this Explanation of Provisions section
regarding the applicability of the
attribute redetermination rule of
§ 1.1502–13(c)(1)(i) to the determination
of FDDEI of a member of a consolidated
group.
F. Related Party Transactions
A sale of property or a provision of a
service may qualify as a FDDEI
transaction, regardless of whether the
recipient of such service is a related
party of the seller or renderer. However,
in the case of a sale of general property
or a provision of a general service to a
related party, section 250(b)(5)(C) and
proposed § 1.250(b)–6 provide
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
additional requirements that must be
satisfied for the transaction to qualify as
a FDDEI sale or FDDEI service. These
requirements must be satisfied in
addition to the general requirements
that apply to such sales and services as
provided in proposed §§ 1.250(b)–3
through 1.250(b)–5.
The proposed regulations define a
related party with respect to any person
as any member of a modified affiliated
group that includes such person.
Proposed § 1.250(b)–1(c)(19). A
modified affiliated group is defined as
an affiliated group as provided in
section 1504(a) by substituting ‘‘more
than 50 percent’’ for ‘‘at least 80
percent’’ each place it appears, and
without regard to section 1504(b)(2) and
(3). Proposed § 1.250(b)–1(c)(17)(i). A
modified affiliated group also includes
any person other than a corporation that
is controlled by one or more members
of a modified affiliated group or that
controls such a member. Proposed
§ 1.250(b)–1(c)(17)(ii). For this purpose,
‘‘control’’ is defined as provided in
section 954(d)(3), meaning direct,
indirect, or constructive ownership
under section 958 of more than 50
percent of the value of the beneficial
interests in such person. Proposed
§ 1.250(b)–1(c)(17)(iii).
1. Related Party Sales
Section 250(b)(5)(C)(i) provides that
property sold to a related party that is
not a U.S. person ‘‘shall not be treated
as for a foreign use unless (I) such
property is ultimately sold by a related
party, or used by a related party in
connection with property which is sold
or the provision of services, to another
person who is an unrelated party who
is not a United States person, and (II)
the taxpayer establishes to the
satisfaction of the Secretary that such
property is for a foreign use.’’
Accordingly, the proposed regulations
provide that a sale of general property
to a foreign related party (a ‘‘related
party sale’’) qualifies as a FDDEI sale
only if certain additional requirements
described in § 1.250(b)–6(c)(1)(i) or (ii)
are satisfied. See proposed § 1.250(b)–
6(c)(1).
If a foreign related party resells the
purchased property (such as where the
foreign related party is a distributor or
a manufacturer of a product that
incorporates the purchased property as
a component), the sale to the foreign
related party qualifies as a FDDEI sale
only if an unrelated party transaction
with respect to such sale occurs and the
unrelated party transaction is a FDDEI
sale. An unrelated party transaction is
generally a transaction between the
foreign related party and an unrelated
PO 00000
Frm 00012
Fmt 4701
Sfmt 4702
foreign person in which the property
purchased by the foreign related party is
sold or used. See proposed § 1.250(b)–
6(b)(5). For purposes of this rule,
whether property is a component of
another property that is subsequently
sold in an unrelated party transaction is
determined without regard to the rule
defining a ‘‘component’’ for purposes of
determining whether general property is
subject to manufacturing, assembly, or
other processing, as described in part
III(C)(3)(a) of this Explanation of
Provisions section. The unrelated party
sale generally must occur on or before
the FDII filing date; otherwise the gross
income from the related party sale is
included in the domestic corporation’s
gross DEI for the taxable year of the
related party sale, but is not included in
its gross FDDEI. See proposed
§ 1.250(b)–6(c)(1)(i). However, if an
unrelated party transaction occurs after
the FDII filing date but within the
period of limitations provided by
section 6511, the proposed regulations
provide that the domestic corporation
may file an amended return for the
taxable year in which the related party
sale occurred claiming the related party
sale as a FDDEI sale for purposes of
determining the taxpayer’s foreignderived intangible income for that
taxable year, provided that the sale
otherwise meets the requirements in
proposed § 1.250(b)–6(c)(1)(i). See id.
The Treasury Department and the IRS
welcome comments on whether
alternatives should be considered in
lieu of requiring the filing of an
amended return.
For transactions other than the resale
of purchased property, such as where
the foreign related party uses the
purchased property to produce other
property that is sold in unrelated party
transactions, or where the foreign
related party uses the property in the
provision of a service in an unrelated
party transaction, the sale of property
does not qualify as a FDDEI sale unless,
as of the FDII filing date, the seller
reasonably expects that more than 80
percent of the revenue earned by the
foreign related party from the use of the
property in all transactions will be
earned from unrelated party
transactions that are FDDEI transactions
(determined without regard to the
documentation requirements in
§ 1.250(b)–4 or § 1.250(b)–5). See
proposed § 1.250(b)–6(c)(1)(ii).
The rules applicable to related party
sales apply only to determine whether
sales of general property qualify as a
FDDEI sale. See proposed § 1.250(b)–
6(c)(1). Sales of intangible property,
whether to a related or an unrelated
party, are for a foreign use only to the
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
extent that the intangible property
generated revenue from exploitation
outside the United States. See proposed
§ 1.250(b)–4(e)(2) and part III(C)(3)(b) of
this Explanation of Provisions section.
Thus, additional rules with respect to
related party sales of intangible property
are unnecessary to ensure that such
sales are ultimately for a foreign use.
2. Related Party Services
Section 250(b)(5)(C)(ii) provides that a
service provided to a related party not
located in the United States ‘‘shall not
be treated [as a FDDEI service] unless
the taxpayer establishe[s] to the
satisfaction of the Secretary that such
service is not substantially similar to
services provided by such related party
to persons located within the United
States.’’ Accordingly, the proposed
regulations generally provide that a
provision of a general service to a
business recipient that is a related party
qualifies as a FDDEI service only if the
service is not substantially similar to a
service provided by the related party to
persons located within the United
States. See proposed § 1.250(b)–6(d)(1).
Absent section 250(b)(5)(C)(ii) and
proposed § 1.250(b)–6(d)(1) (the ‘‘related
party services rule’’), a domestic
corporation could generate gross FDDEI
from the provision of services that
primarily benefit persons within the
United States by using a related party
located outside the United States as a
conduit. The related party services rule
prevents taxpayers from claiming gross
FDDEI derived from such ‘‘round
tripping’’ arrangements. In contrast,
proximate services, property services,
and transportation services by their
nature present minimal risk for ‘‘round
tripping,’’ because the location of the
recipient or property, as applicable, for
purposes of such services is generally
determined based on the place of
performance. See proposed § 1.250(b)–
5(f), (g), and (h), and parts III(D)(3), (4),
and (5) of this Explanation of Provisions
section. Further, a general service
provided to a consumer that is a related
party cannot be substantially similar to
a service provided by a consumer to a
person located within the United States,
because a consumer, by definition, is an
individual that purchases the service for
personal use. See proposed § 1.250(b)–
5(c)(3). Accordingly, the proposed
regulations provide that the related
party services rule applies only to
determine whether a general service
provided to a business recipient that is
a related party is a FDDEI service. See
proposed § 1.250(b)–6(d)(1).
A service provided by a renderer to a
related party is ‘‘substantially similar’’
to a service provided by the related
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
party to a person located within the
United States if the renderer’s service
(or ‘‘related party service’’) is used by
the related party to provide a service to
a person located within the United
States and either the ‘‘benefit test’’ of
proposed § 1.250(b)–6(d)(2)(i) or the
‘‘price test’’ of proposed § 1.250(b)–
6(d)(2)(ii) is satisfied. The rules to
determine the location of a recipient of
a service provided by a related party are
generally the same as the rules for
determining the location of a recipient
of a service provided by the renderer.
The benefit test is satisfied if 60
percent or more of the benefits
conferred by the related party service
are to persons located within the United
States. See proposed § 1.250(b)–
6(d)(2)(i). For this purpose, the term
‘‘benefit’’ has the meaning provided in
§ 1.482–9(l)(3). See proposed § 1.250(b)–
5(c)(1). Therefore, a related party service
provides a benefit to a customer of the
related party if it provides ‘‘a reasonably
identifiable increment of economic or
commercial value’’ to the customer,
rather than an indirect or remote
benefit. See § 1.482–9(l)(3)(i) and (ii).
Because the benefit test compares the
benefits from the service provided to
persons located in the United States to
the total benefits from the service
provided by the renderer (rather than to
the total benefits of the service provided
by the related party), a service provided
to a related party is ‘‘substantially
similar’’ to a service provided by the
related party to persons located within
the United States if 60 percent or more
of the benefits of the service are
conferred on persons located within the
United States, even if the related party
adds significant value to the service
through, for instance, bundling the
related party service with other high
value services.
Under the price test, a service
provided by a renderer to a related party
is ‘‘substantially similar’’ to a service
provided by the related party to a
person located within the United States
if the renderer’s service is used by the
related party to provide a service to a
person located within the United States
and 60 percent or more of the price that
persons located within the United States
pay for the service provided by the
related party is attributable to the
renderer’s service. See proposed
§ 1.250(b)–6(d)(2)(ii). Therefore, the
price test compares the value of the
service that is provided by the renderer
to the related party to the value of the
service that is provided by the related
party to its customers. Consequently, a
related party service that is not treated
as substantially similar to a service
provided by the related party to persons
PO 00000
Frm 00013
Fmt 4701
Sfmt 4702
8199
located in the United States under the
benefit test, because more than 40
percent of the benefits from the service
are conferred to persons located outside
the United States, is nonetheless treated
as ‘‘substantially similar’’ under the
price test if the related party service
accounts for 60 percent or more of the
total price that is charged to customers
located within the United States.
If a related party service is treated as
substantially similar to a service
provided by the related party to a
person located within the United States
solely by reason of the price test, the
general rule that wholly disqualifies the
related party service as a FDDEI service
does not apply. Rather, in such case, a
portion of the gross income from the
related party service will be treated as
a FDDEI service corresponding to the
ratio of benefits conferred by the related
party service to persons not located
within the United States to the sum of
all benefits conferred by the related
party service. See proposed § 1.250(b)–
6(d)(1).
IV. Section 250 Deduction for
Individuals Making a Section 962
Election
As discussed in part II of this
Explanation of Provisions section, the
section 250 deduction for FDII and
GILTI is available only to domestic
corporations. However, section 962(a)(1)
provides that an individual that is a U.S.
shareholder may generally elect to be
taxed on amounts included in the
individual’s gross income under section
951(a) in ‘‘an amount equal to the tax
that would be imposed under section 11
if such amounts were received by a
domestic corporation.’’ GILTI is treated
as an amount included under section
951(a) for purposes of section 962. See
section 951A(f)(1)(A) and proposed
§ 1.951A–6(b)(1). A section 962 election
can be made by an individual U.S.
shareholder who is considered, by
reason of section 958(b), to own stock of
a foreign corporation owned (within the
meaning of section 958(a)) by a
domestic pass-through entity, including
a partnership or an S corporation. See
§ 1.962–2(a).
Congress enacted section 962 to
ensure that individuals’ tax burdens
with respect to undistributed foreign
earnings of their CFCs ‘‘will be no
heavier than they would have been had
they invested in an American
corporation doing business abroad.’’ S.
Rept. 1881, 1962–3 C.B. 784, at 798.
Existing § 1.962–1(b)(1)(i) provides that
a deduction of a U.S. shareholder does
not reduce the amount included in gross
income under section 951(a) for
purposes of computing the amount of
E:\FR\FM\06MRP2.SGM
06MRP2
8200
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
tax that would be imposed under
section 11. However, allowing a section
250 deduction with respect to GILTI of
an individual (including an individual
that is a shareholder of an S corporation
or a partner in a partnership) that makes
an election under section 962 is
consistent with the purpose of that
provision of ensuring that such
individual’s tax burden with respect to
its CFC’s undistributed foreign earnings
is no greater than if the individual
owned such CFC through a domestic
corporation. Accordingly, the proposed
regulations provide that, for purposes of
section 962, ‘‘taxable income’’ as used
in section 11 of an electing individual
is reduced by the portion of the section
250 deduction that would be allowed to
a domestic corporation with respect to
the individual’s GILTI and the section
78 gross-up attributable to the
shareholder’s GILTI. See proposed
§ 1.962–1(b)(1)(i)(B)(3).
V. Application of Section 250 to
Consolidated Groups
As discussed in the Background
section of this preamble, section 250
provides a domestic corporation a
deduction for its FDII, GILTI, and the
section 78 gross-up attributable to its
GILTI. The section 250 deduction is
available to a member of a consolidated
group (‘‘member’’) in the same manner
as the deduction is available to any
domestic corporation. However, a
computation of a member’s section 250
deduction based solely on its items of
income and QBAI may not result in a
clear reflection of the consolidated
group’s income tax liability. For
example, a consolidated group could
segregate all of its QBAI in one member,
thereby decreasing the DTIR of other
members relative to the consolidated
group’s DTIR if determined at a group
level. Alternatively, a strict, separateentity application of section 250 could
inappropriately decrease a consolidated
group’s aggregate amount of deduction
for its FDII, for instance, because one
member’s DII (which is the excess of
DEI over DTIR) would not be taken into
account in calculating the FDII of
another member that has FDDEI in
excess of its DEI.
Based on the foregoing, the proposed
regulations provide that a member’s
section 250 deduction is determined by
reference to the relevant items of all
members of the same consolidated
group. Consistent with the authority
provided by section 1502, the proposed
regulations ensure that the aggregate
amount of section 250 deductions
allowed to members appropriately
reflects the income, expenses, gains,
losses, and property of all members.
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
Definitions in proposed § 1.1502–50(f)
result in the aggregation of the DEI,
FDDEI, DTIR, and GILTI of all members.
These aggregate numbers and the
consolidated group’s consolidated
taxable income are then used to
calculate an overall deduction amount
for the group. Proposed § 1.1502–50(b)
then allocates this overall deduction
amount among the members on the
basis of their respective contributions to
the consolidated group’s aggregate
amount of FDDEI and the consolidated
group’s aggregate amount of GILTI.
The proposed regulations also address
two issues relating to intercompany
transactions. First, the proposed
regulations add an example to § 1.1502–
13 demonstrating the applicability of
the attribute redetermination rule of
§ 1.1502–13(c)(1)(i) to the determination
of FDDEI. This example applies the
intercompany transaction rules to
clearly reflect consolidated taxable
income. It does not indicate a change in
the law. In this example, the attribute
redetermination rule applies to gross
DEI and gross FDDEI, which are
attributes of an intercompany or
corresponding item. The Treasury
Department and the IRS were concerned
that applying § 1.1502–13(c) to DEI and
FDDEI directly could result in circular
computations due to the apportionment
of certain expenses on a gross income
basis. In addition, the example
illustrates the applicability of the
attribute redetermination rule in the
context of an intercompany loss. In such
circumstances, the application of the
allocation and apportionment rules of
§§ 1.861–8 through 1.861–14T and
1.861–17 may be modified in order to
achieve the same overall result within
the consolidated group that would occur
if the members were divisions of a
single corporation.
Second, the proposed regulations
provide that, for purposes of
determining a member’s QBAI, the basis
of specified tangible property will not
be affected by an intercompany
transaction. See proposed § 1.1502–
50(c)(1). Accordingly, an intercompany
transaction cannot result in the increase
or decrease of a consolidated group’s
aggregate amount of DTIR or, in turn,
aggregate amount of deduction.
VI. Reporting Requirements
To claim a deduction under section
250 by reason of having FDII, a taxpayer
must calculate its deemed intangible
income, deduction eligible income, and
foreign-derived deduction eligible
income. None of these terms are used in
other provisions of the Code, and thus
pre-existing forms do not collect data
relevant to determining these amounts.
PO 00000
Frm 00014
Fmt 4701
Sfmt 4702
In addition, when calculating its
deduction under section 250, a taxpayer
must determine the application of the
taxable income limitation of section
250(a)(2). In order to effectively
administer and enforce section 250, the
proposed regulations require the
collection of relevant information on
new or existing forms.
A domestic corporation or an
individual making an election under
section 962 that claims a deduction
under section 250 for a taxable year
must make an annual return on Form
8993, ‘‘Section 250 Deduction for
Foreign-Derived Intangible Income
(FDII) and Global Intangible Low-Taxed
Income (GILTI)’’ (or any successor form)
for such year, providing the information
required by the form. See proposed
§ 1.250(a)–1(d).
Certain related party transactions are
reported on various information returns
under sections 6038 and 6038A. Under
section 6038(a)(1), U.S. persons that
control foreign business entities
(‘‘controlling U.S. persons’’) must report
certain information with respect to
those entities, which includes
information listed in section
6038(a)(1)(A) through (E), as well as
information that ‘‘the Secretary
determines to be appropriate to carry
out the provisions of this title.’’ This
information is reported on Form 5471,
‘‘Information Return of U.S. Persons
With Respect To Certain Foreign
Corporations,’’ or Form 8865, ‘‘Return of
U.S. Persons With Respect to Certain
Foreign Partnerships,’’ as applicable.
Section 6038A requires 25-percent
foreign-owned domestic corporations
(‘‘reporting corporations’’) to file certain
information returns with respect to
those corporations, including
information related to transactions
between the reporting corporation and
each foreign person which is a related
party to the reporting corporation. This
information is reported on Form 5472,
‘‘Information Return of a 25% ForeignOwned U.S. Corporation or a Foreign
Corporation Engaged in a U.S. Trade or
Business.’’ In order to effectively
administer and enforce section 250, the
proposed regulations provide that
controlling U.S. persons or reporting
corporations, as described above, that
claim a deduction under section 250
determined by reference to FDII with
respect to amounts reported on Form
5471, 5472, or 8865 must report certain
information relating to transactions with
foreign business entities or related
parties in accordance with sections 6038
and 6038A. See proposed §§ 1.6038–
2(f)(15), 1.6038–3(g)(4), and 1.6038A–
2(b)(5)(iv).
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
Certain partnerships and their
partners also have reporting
requirements under sections 6031 and
6038 with respect to partnership
income. A domestic partnership is
generally required to file an annual
information return (Form 1065, ‘‘U.S.
Return of Partnership Income’’) and
provide information to its partners on
Schedule K–1 (Form 1065), ‘‘Partner’s
Share of Income, Deductions, Credits,
etc.,’’ with respect to each partner’s
distributive share of partnership items
and other information. See section 6031
and § 1.6031(b)–1T. The proposed
regulations provide that a partnership
that has one or more direct or indirect
partners that are domestic corporations
and that is required to file a return
under section 6031 must furnish on
Schedule K–1 (Form 1065) the partner’s
share of the partnership’s gross DEI,
gross FDDEI, deductions that are
definitely related to the partnership’s
gross DEI and gross FDDEI, and
partnership QBAI for each taxable year
in which the partnership has gross DEI,
gross FDDEI, or partnership specified
tangible property. See proposed
§ 1.250(b)–1(e)(2). Although a foreign
partnership that does not have income
effectively connected with a trade or
business within the United States or
U.S. source income is not required to
file Form 1065, a U.S. person who owns
a ten-percent interest or a fifty-percent
interest of a foreign partnership
controlled by U.S. persons is required to
report certain information under section
6038. Similar to the requirements for
partnership reporting on Form 1065, the
proposed regulations require controlling
ten-percent partners and controlling
fifty-percent partners (as defined in
§ 1.6038–3(a)(1) and (2)) of certain
foreign partnerships controlled by U.S.
persons to report on Schedule K–1
(Form 8865), ‘‘Partner’s Share of
Income, Deductions, Credits, etc.,’’ the
partner’s share of the partnership’s gross
DEI, gross FDDEI, deductions that are
definitely related to the partnership’s
gross DEI and gross FDDEI, and
partnership QBAI. See proposed
§ 1.6038–3(g)(4).
VII. Applicability Dates
Proposed §§ 1.250(a)–1 through
1.250(b)–6 are proposed to apply to
taxable years ending on or after March
4, 2019. See section 7805(b)(1)(B).
However, the Treasury Department and
the IRS recognize that these rules may
apply to transactions that have occurred
before the filing of these proposed
regulations and that taxpayers may not
be able to obtain the documentation
required for transactions that have
already been completed. Accordingly,
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
for taxable years beginning on or before
March 4, 2019, taxpayers may use any
reasonable documentation maintained
in the ordinary course of the taxpayer’s
business that establishes that a recipient
is a foreign person, property is for a
foreign use (within the meaning of
proposed § 1.250(b)–4(d) and (e)), or a
recipient of a general service is located
outside the United States (within the
meaning of proposed § 1.250(b)–5(d)(2)
and (e)(2)), as applicable, in lieu of the
documentation required in proposed
§§ 1.250(b)–4(c)(2), (d)(3), and (e)(3) and
1.250(b)–5(d)(3) and (e)(3), provided
that such documentation meets the
reliability requirements described in
proposed § 1.250(b)–3(d). Reasonable
documentation includes, but is not
limited to, documents described in or
similar to the documents described in
proposed §§ 1.250(b)–4(c)(2), (d)(3), and
(e)(3) and 1.250(b)–5(d)(3) and (e)(3).
For this purpose, reasonable
documentation also includes the
documentation described in the special
rules for small businesses and small
transactions in proposed §§ 1.250(b)–
4(c)(2)(ii) and (d)(3)(ii) and 1.250(b)–
5(d)(3)(ii) and (e)(3)(ii), even if the
taxpayer would not otherwise qualify
for the special rules. The Treasury
Department and the IRS welcome
comments on this special applicability
date rule.
Proposed § 1.962–1(b)(1)(i)(B)(3),
which allows individuals making an
election under section 962 to take into
account the section 250 deduction, is
proposed to apply to taxable years of a
foreign corporation ending on or after
March 4, 2019, and with respect to a
U.S. person, for the taxable year in
which or with which such taxable year
of the foreign corporations ends. See id.
Taxpayers may rely on proposed
§§ 1.250(a)–1 through 1.250(b)–6 and
§ 1.962–1(b)(1)(i)(B)(3) for taxable years
ending before May 4, 2019.
Proposed § 1.1502–50 is proposed to
apply to consolidated return years
ending on or after the date of
publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register. See sections
1503(a) and 7805(b)(1)(A). Taxpayers
may rely on proposed § 1.1502–50 for
taxable years ending before the date of
publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register.
Proposed §§ 1.6038–2(f)(15) and
1.6038A–2(b)(5)(iv) are proposed to
apply with respect to information for
annual accounting periods beginning on
or after May 4, 2019. See sections
6038(a)(3) and 7805(b)(1)(B). Proposed
§ 1.6038–3(g)(4) is proposed to apply to
taxable years of a foreign partnership
PO 00000
Frm 00015
Fmt 4701
Sfmt 4702
8201
beginning on or after May 4, 2019. See
section 7805(b)(1)(B).
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 13563 and 12866
direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility.
These proposed regulations have been
designated as economically significant
by the Office of Management and
Budget’s Office of Information and
Regulatory Affairs (OIRA) and subject to
review under Executive Order 12866
pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding
review of tax regulations.
A. Background
As described in part I of the
Explanation of Provisions section, the
section 250 deduction is an important
component of the changes to the U.S.
international tax system included in the
Act. The purpose of the section 250
deduction is to minimize the role that
U.S. tax considerations play in a
domestic corporation’s decision
whether to service foreign markets
directly or through a controlled foreign
corporation (‘‘CFC’’). See Senate
Explanation, at 370 (‘‘[O]ffering similar,
preferential rates for intangible income
derived from serving foreign markets,
whether through U.S.-based operations
or through CFCs, reduces or eliminates
the tax incentive to locate or move
intangible income abroad, thereby
limiting one margin where the Code
distorts business investment
decisions.’’). Further, the section 250
deduction protects the U.S. tax base
against base erosion incentives created
by the new participation exemption
system established under section 245A,
discussed in part I of the Explanation of
Provisions section. At the most basic
level, the section 250 deduction is
allowed to a domestic corporation with
respect to its intangible income derived
from foreign markets, resulting in a
lower effective rate of U.S. tax on its
global intangible low-taxed income
E:\FR\FM\06MRP2.SGM
06MRP2
8202
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
(‘‘GILTI’’) and foreign-derived intangible
income (‘‘FDII’’).
The Act defines a corporation’s FDII
as the portion of its return in excess of
a return on tangible assets that is
derived from serving foreign markets,
while it defines a corporation’s GILTI as
the portion of its return in excess of a
return on tangible assets that is derived
through its foreign affiliates. FDII and
GILTI are calculated through formulas
set out in sections 250 and 951A,
respectively. For taxable years between
2018 and 2026, section 250 generally
allows a deduction equal to the sum of
37.5 percent of the corporation’s FDII
plus 50 percent of its GILTI (thereafter,
these deductions are reduced to 21.875
percent and 37.5 percent, respectively).
These deduction rates produce
comparable tax rates on income earned
from serving foreign markets, regardless
of where such income is earned.
Different percentages are required by the
Act to achieve approximate parity, given
that the 80 percent limitation on foreign
tax credits in section 960(d) results in
additional U.S. tax.2 More specifically,
the Act defines a domestic corporation’s
FDII as its deemed intangible income
(‘‘DII’’) multiplied by the percentage of
its deduction eligible income (‘‘DEI’’)
that is foreign-derived deduction
eligible income (‘‘FDDEI’’). The Act
defines DEI as the excess of the
corporation’s gross income (with certain
exclusions 3) over deductions (including
taxes) properly allocable to the income.
The Act defines DII as the excess (if any)
of its DEI over 10 percent of its qualified
business asset investment (‘‘QBAI’’), or
tangible asset base. The Act defines
FDDEI as DEI derived from sales of
property to foreign persons for foreign
use and from the provision of services
to persons, or with respect to property,
located outside the United States.
2 At the most basic level, abstracting from various
complexities of the GILTI regime, the 21 percent
U.S. statutory rate with a 50 percent deduction for
GILTI implies that at foreign effective rates in
excess of 10.5 percent (assuming no U.S. expenses),
foreign tax credits are sufficient to fully offset U.S.
tax on GILTI income. However, the GILTI regime
limits foreign tax credits to 80 percent of their total
value, so a ‘‘baseline’’ GILTI scenario, with zero
expense allocations, implies that foreign tax credits
can fully offset U.S. tax on GILTI at foreign effective
tax rates in excess of 13.125 percent (i.e., 10.5/0.8).
The section 250 deduction for FDII is also intended
to have a ‘‘baseline rate’’ of 13.125 percent (i.e., 0.21
× (1¥0.375)); typically foreign tax credits are not
relevant for FDII, and there is no 80 percent
limitation applied to foreign tax credits with respect
to FDII.
3 The exclusions are: (1) Subpart F inclusions
(section 951); (2) GILTI; (3) financial services
income (as defined in section 904(d)(2)(D)); (4)
dividends received from the corporation’s CFCs; (5)
domestic oil and gas extraction income; and (6)
foreign branch income (as defined in section
904(d)(2)(J)).
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
Finally, if the sum of a corporation’s
FDII and GILTI exceeds its taxable
income (determined without regard to
section 250), then the Act requires that
the amount of FDII and GILTI for which
a deduction is allowed is reduced pro
rata by the excess. While the Act
provides the framework for determining
a domestic corporation’s FDII, it grants
discretion to the Secretary to establish
how certain requirements, such as
whether sales are for a foreign use, are
satisfied. See sections 250(b)(4)(A) and
(B), (b)(5)(C)(i)(II), and (b)(5)(C)(ii). In
addition, the Act does not address all of
the details necessary to calculate FDII,
such as the allocation of expenses.
Further, the Act is unclear regarding
whether the section 250 deduction for
FDII is available for certain foreign
military sales or services and whether a
section 250 deduction for GILTI is
available for an individual taxpayer
making a section 962 election. The
following analysis describes the need
for the proposed regulations and
discusses the costs and benefits relative
to the baseline, as well as the important
alternative regulatory choices that were
considered.
with respect to GILTI if they make an
election under section 962.
Finally and importantly, the proposed
regulations also seek to provide clarity
and guidance regarding the types of
documentation required to substantiate
that, in fact, sales of property are to
foreign persons for a foreign use and
provisions of services are to persons, or
with respect to property, located outside
the United States. In developing the
proposed regulations, the Treasury
Department and the IRS sought to
balance the need for rigorous
documentation to ensure compliance
with the desire to minimize
administrative burden and costs to
taxpayers.
B. The Need for Proposed Regulations
The purpose of the proposed
regulations is to provide guidance to
taxpayers in determining the amount of
their deduction under section 250.
Section 250(c) states that ‘‘[t]he
Secretary shall prescribe such
regulations or other guidance as may be
necessary or appropriate to carry out the
provisions of [section 250].’’ Therefore,
the proposed regulations seek to provide
the detail, structure, and language
required to implement section 250.
The proposed regulations seek to
assist taxpayers in calculating the
allowable section 250 deduction, for
example, by providing details on how to
compute FDII, and the components of
FDII such as QBAI, DEI, and FDDEI. In
particular, with respect to FDDEI, the
proposed regulations provide guidance
on which sales of property and which
provisions of services generate gross
income included in FDDEI, and on how
to allocate expenses to such gross
income to determine FDDEI.
In addition, the proposed regulations
provide an ordering rule to coordinate
the computation of the section 250
taxable income limitation with the
taxable income limitations across other
provisions of the Code.
The proposed regulations also seek to
clarify that the section 250 deduction
for FDII is available for certain foreign
military sales and services. In addition,
the proposed regulations allow a section
250 deduction to individual taxpayers
D. Cost and Benefits of the Proposed
Regulations and Potential Alternatives
The proposed regulations provide
certainty, clarity, and consistency in the
application of the section 250 deduction
by unambiguously defining terms,
calculations, and acceptable forms of
documentation, and also by making
clear the conditions under which
military sales are eligible to claim the
deduction. In the absence of such
guidance, the chance that different
taxpayers would interpret the statute
differently would be exacerbated.
Similarly situated taxpayers might
interpret the statutory rules pertaining
to particular sales or services
differently, with one taxpayer pursuing
a sale that another taxpayer might
decline to make, because of different
interpretations of how the income
would be treated under section 250. If
this second taxpayer’s activity were
more profitable, an economic loss arises.
Such situations are more likely to arise
in the absence of guidance. While no
guidance can curtail all differential or
inaccurate interpretations of the statute,
the proposed regulations will
significantly mitigate the chance for
such interpretations and thereby
increase economic efficiency.
In general, the Treasury Department
and the IRS expect that in the absence
of this guidance, taxpayers would
undertake fewer eligible sales and
services. Thus, the proposed regulation
will generally enhance U.S. sales and
PO 00000
Frm 00016
Fmt 4701
Sfmt 4702
C. Baseline
The economic analysis that follows
compares the proposed regulations to a
no-action baseline reflecting anticipated
Federal income tax-related behavior in
the absence of the proposed regulations.
A no-action baseline reflects the current
environment including the existing
international tax regulations, prior to
any amendment by the proposed
regulations.
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
services across all eligible activities. The
Treasury Department and the IRS have
not made quantitative estimates of these
effects.
The benefits and costs of major,
specific provisions of these proposed
regulations relative to the no-action
baseline and alternatives to these
proposed rules considered by the
Treasury Department and the IRS are
discussed in further detail below.
1. Documentation Requirements
The proposed regulations set forth
what forms of documentation can be
used to substantiate that receipts qualify
as ‘‘foreign-derived’’ for purposes of
FDII and the section 250 deduction. In
general, the Treasury Department and
the IRS weighed the compliance burden
imposed on taxpayers from
documentation requirements against the
need for documentation to be
sufficiently rigorous in establishing
foreign use or the location of a person
that receives a service. Because the
statute provides different requirements
for sales or services to qualify for a
section 250 deduction and the proposed
regulations provide different
requirements depending on the type of
sale or the type of service, and because
documentation needs to be tailored to
the applicable requirement, the
proposed regulations specify different
types of acceptable documentation for
different types of transactions. In
particular, documentation requirements
vary with respect to the determination
of whether a sale of property is to a
foreign person, whether a sale of general
property is for a foreign use, whether a
sale of intangible property is for a
foreign use, whether an individual
consumer of a general service is located
outside the United States, and whether
a business recipient of a general service
is located outside the United States.
In each case, the proposed regulations
provide that the list of acceptable
documentation constitutes reasonable
proof that a transaction is a FDDEI
transaction. In general, the types of
documentation listed are readily
accessible to most taxpayers. For
example, with respect to demonstrating
foreign use for general property,
taxpayers can show evidence of
shipment to a location outside the
United States (presuming that the seller
has no knowledge or reason to know
that that information is unreliable or
incorrect).
To further reduce compliance
burdens, the proposed regulations allow
additional flexibility for particular types
of taxpayers or transactions. For
example, throughout the proposed
regulations, small businesses (defined in
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
the proposed regulations as taxpayers
with less than $10 million of gross
receipts annually) are subject to less
stringent documentation requirements
because their smaller scale makes
compliance more burdensome for them
and makes the sophisticated tax
minimization planning that can
sometimes characterize abuse unlikely.
Small transactions (defined in the
proposed regulations as less than $5,000
of gross receipts from a single recipient)
are also subject to less stringent
documentation requirements, because
the fixed costs of compliance likely
account for a larger fraction of the profit
on small transactions, and large scale
abuse is less likely. The Treasury
Department and the IRS request
comments on whether the thresholds in
the proposed regulations for small
businesses and small transactions are
appropriate and especially solicit
comments that provide data, other
evidence, and models that can enhance
the rigor of the process by which such
thresholds are determined. Further, the
proposed regulations allow a more
flexible approach for the documentation
of sales of fungible general property
because it is burdensome and
unnecessary to track each sale of a
fungible item as long as the taxpayer can
establish by documentation that a
certain percentage of the fungible
property is for a foreign use.
In determining appropriate
documentation requirements, the
Treasury Department and the IRS
balanced the rigor and reliability of the
proof that transactions are foreignderived with the cost to taxpayers of
obtaining such documentation. The
Treasury Department and the IRS
considered a spectrum of trade-offs
between the rigor of proof of foreign use
and the burden such proof would
impose on taxpayers. One option
considered was allowing only the most
stringent form of documentation in each
case (for example, a written statement of
foreign use made under penalties of
perjury, plus evidence of such use)
without any flexibility, but this was
deemed overly burdensome for
taxpayers and foreign buyers. Overly
burdensome documentation
requirements might shift transactions to
sellers that do not need or cannot use
the FDII deduction, or it may discourage
foreign persons from transacting with a
U.S. seller or renderer. The Treasury
Department and the IRS aimed to
propose rules that would not alter
economic decisions because of these
concerns. In addition, highly
burdensome rules may lead to abuse.
For example, a foreign buyer that
PO 00000
Frm 00017
Fmt 4701
Sfmt 4702
8203
falsifies documentation provided to a
domestic corporation to allow the
corporation to obtain a deduction would
not be subject to penalties by the IRS.
Because the incentives for compliance
by foreign buyers are limited (for
example, contractual liability between
the parties), the burden should also be
limited. In comparison, chapters 3 and
4 of subtitle A of the Code require U.S.
financial institutions to withhold on
certain payments to foreign persons if
they do not provide documentation.
Because of the enforcement mechanism
built into the statutes in chapters 3 and
4 (i.e., withholding), the IRS can require
stricter documentation (for example,
most foreign persons have to provide to
the financial institution a specific IRS
form, completed and signed under
penalties of perjury, and in some cases
must attach additional documentation
on underlying payees).
The Treasury Department and the IRS
also considered a system in which
taxpayers submitted documentation in
advance of a potential FDDEI
transaction for the IRS to review and
determine whether the documentation
is sufficient. This option was rejected
because the time involved would delay
normal business transactions.
A third option that the Treasury
Department and the IRS considered was
to allow a taxpayer to use its discretion
to determine what type of
documentation is appropriate, but this
would not provide sufficient clarity and
assurance to taxpayers and is potentially
open to abuse. For each type of
transaction, the Treasury Department
and the IRS chose to allow a menu of
acceptable documentation options that
vary according to the type of
transaction, and selected documentation
options that would be readily available
to the taxpayer whenever possible. By
allowing taxpayers to, in some cases,
rely on documents already obtained in
the normal course of business, the
proposed regulations impose essentially
zero documentation cost in such cases.
The Treasury Department and the IRS
request comments on the approaches
and decisions relating to documentation
requirements discussed in this part
I(D)(1) of this Special Analyses section.
See part II of this Special Analyses
section regarding the Paperwork
Reduction Act for additional discussion
on the expected paperwork burden of
these documentation requirements.
2. Computation of the Ratio of FDDEI to
DEI
The proposed regulations provide
guidance on the computation of the
foreign-derived ratio. As noted in part
I(A) of this Special Analyses section, the
E:\FR\FM\06MRP2.SGM
06MRP2
8204
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
Act defines a corporation’s FDII as its
DII multiplied by the corporation’s
foreign-derived ratio, which is the ratio
of its DEI to its FDDEI. The proposed
regulations specify that, for purposes of
determining the numerator of the
foreign-derived ratio, the domestic
corporation must allocate expenses to
its gross FDDEI. The Treasury
Department and the IRS deemed this
approach the most consistent with the
statute by providing what the Treasury
Department and the IRS have
determined to be the most accurate
measure of the corporation’s income
that is ‘‘foreign-derived,’’ through
matching of expenses to gross income.
The Treasury Department and the IRS
considered two other approaches; one,
in which the foreign-derived ratio
would be computed as the ratio of
foreign versus U.S. gross receipts and
another in which the ratio would be
computed as foreign versus U.S. gross
income. The Treasury Department and
the IRS have determined that both of
these approaches would result in a less
accurate measure of foreign-derived net
income. The Treasury Department and
the IRS have determined that these
alternative approaches could also
reward low margin (or even lossleading) sales or services to foreign
markets by allowing a section 250
deduction due to positive gross receipts
or income from foreign sources, even if
the net income from foreign sources
after allocated expenses is zero or
negative. The Treasury Department and
the IRS have determined that the chosen
alternative generally provides the most
accurate computation of FDII but solicit
comments on whether an alternative
method would be more appropriate.
3. Military Sales
Section 250 requires sales to be made
to a foreign person and services to be
provided to a person located outside the
United States but does not include
specific rules applicable to foreign
military sales or services. For example,
many sales of military equipment and
services by a U.S. defense contractor to
a foreign government are structured,
pursuant to the Arms Export Control
Act, as sales and services provided to
the U.S. government for resale or onservice to the foreign government. See
part III(B)(2) of the Explanation of
Provisions section for additional
discussion of the Arms Export Control
Act. In effect, the contractor is selling
goods and services to a foreign person,
but the sale is technically made to the
U.S. government. The Treasury
Department and the IRS recognize that
the statute is unclear as to whether
certain foreign military sales and
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
services can qualify for the section 250
deduction, due to the concern that a
foreign military sale or service pursuant
to the Arms Export Control Act would
not qualify as a sale or service to a
foreign person since the sale is actually
made to the U.S. government and not to
a foreign person or a person located
outside the United States.
The Treasury Department and the IRS
considered several options for
addressing this issue. One option was
not addressing this issue in the
proposed regulations. This option was
rejected because the Treasury
Department and the IRS determined that
it would perpetuate uncertainty about
the application of section 250 to foreign
military sales and services and could
result in economic inequities if some
taxpayers took the position that foreign
military sales and services qualify for a
section 250 deduction but other
similarly-situated taxpayers took the
position that such sales and services do
not qualify. A second option the
Treasury Department and the IRS
considered was to clarify that a foreign
military sale or service through the U.S.
government can never qualify for a
section 250 deduction. However, this
option was rejected because the
Treasury Department and the IRS
determined that it would treat taxpayers
in the defense industry inequitably
relative to other industries by denying
them a section 250 deduction with
respect to a significant amount of their
foreign market sales or services. A third
option the Treasury Department and the
IRS considered was to allow any sale or
service to a U.S. person that acts as an
intermediary and does not take on the
benefits and burdens of ownership to
potentially qualify for a section 250
deduction if there is an ultimate foreign
recipient. This option was rejected
because the Treasury Department and
the IRS determined that such a broad
exception would allow multiple
deductions in instances where both the
seller and the intermediary buyer are
U.S. taxpayers, because both the seller
and the intermediary could potentially
qualify for a section 250 deduction. In
contrast, the U.S. government is not a
taxpayer eligible for a section 250
deduction so only the seller would
benefit from a special rule for military
exports. Furthermore, determining
whether a party is an ‘‘intermediary’’ for
this purpose would require a complex
facts and circumstances analysis of
whether the party had the benefits and
burdens of ownership, which could
create uncertainty in the application of
section 250 with respect to any
PO 00000
Frm 00018
Fmt 4701
Sfmt 4702
transaction in which property or
services are sold for resale or on-service.
The proposed regulations provide
uniform tax treatment across the
economy by generally allowing all
sectors to claim the section 250
deduction, subject to other applicable
rules. Otherwise, certain sales and
services by the defense industry that are
clearly intended for a foreign use, and
that satisfy all other requirements under
section 250, would be denied the benefit
solely as a result of such sales or
services being first made to the U.S.
government under the Arms Export
Control Act, whereas other industries
that are not subject to the Arms Export
Control Act would not have this
concern. Therefore, the proposed
regulations provide that foreign military
sales or services to the U.S. government
under the Arms Export Control Act
would be treated as a sale of property
or provision of a service to a foreign
person. This rule seeks to provide
uniform tax treatment between the
defense sector and other sectors of the
U.S. economy with respect to sales and
services that are clearly meant for a
foreign use.
4. Section 962
The section 250 deduction for FDII
and GILTI is available only to domestic
corporations. However, Congress
enacted section 962 in Public Law 89–
834 (1962) to ensure that individuals’
tax burdens with respect to
undistributed foreign earnings of their
CFCs are comparable with their tax
burdens if they had held their CFCs
through a domestic corporation. See S.
Rept. 1881, 87th Cong., 2d Sess. 92
(1962). Allowing a section 250
deduction with respect to GILTI of an
individual (including an individual that
is a shareholder of an S corporation or
a partner in a partnership) that makes an
election under section 962 provides
comparable treatment for this income.
The Treasury Department and the IRS
considered two options with respect to
extending the section 250 deduction to
individuals (which include, for this
purpose, individual partners in
partnerships and individual
shareholders in S corporations) that
make an election under section 962. The
first option considered was to not allow
the deduction for individuals. Not
allowing the section 250 deduction
would require that individuals that own
their CFCs directly (or indirectly
through a partnership or S corporation)
transfer the stock of their CFCs to new
U.S. corporations in order to obtain the
benefit of the section 250 deduction.
The Treasury Department and the IRS
determined that such reorganization
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
would be economically costly, both in
terms of legal fees and substantive
economic costs related to organizing
and operating new corporate entities.
The second option considered was to
give individuals the section 250
deduction with respect to their GILTI if
they make the section 962 election. The
Treasury Department and the IRS
determined that allowing individuals
the section 250 deduction would
improve economic efficiency by
preventing the need for costly
restructuring solely for the purpose of
tax savings. This is the option adopted
by the Treasury Department and the IRS
in the proposed regulations. The
Treasury Department and the IRS
welcome comments on whether an
alternative approach would be more
appropriate.
II. Paperwork Reduction Act
The proposed regulations provide the
authority for the IRS to require
taxpayers to file certain forms
(identified and discussed in further
detail below) with the IRS to obtain the
benefit of the section 250 deduction. In
order to provide advance notice and
solicit public comment, the IRS released
drafts of the relevant forms in 2018
based on the statutory language and
requested comments. The IRS received
no comments on the forms during the
comment period. The 2018 versions of
the forms that were released in 2018 are
available at https://www.irs.gov/formsinstructions. The Treasury Department
and the IRS are not proposing to make
any changes to those forms through
these regulations. The Treasury
Department and the IRS are also
soliciting public comment on the forms
and paperwork requirements in general
discussed in the proposed regulations.
The Treasury Department and the IRS
specifically request comments on
whether there are (1) ways to reduce the
burdens associated with the forms, (2)
opportunities to clarify the forms or
associated instructions, or (3) ways to
improve the quality of the collections in
general.
The proposed regulations require all
taxpayers with a section 250 deduction
to file one new form (Form 8993). The
proposed regulations also authorize the
IRS to request additional information on
several existing forms (Forms 1065
(Schedule K–1), 5471, 5472, and 8865)
if the filer of the form has a deduction
under section 250. With respect to
Forms 5471, 5472, and 8993, the
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
proposed regulations do not specify the
information that will be required from
taxpayers that have a section 250
deduction, but instead provide that this
information will be prescribed by the
forms and instructions. With respect to
Forms 1065 (Schedule K–1) and 8865,
the proposed regulations specify the
additional information that must be
provided. For additional explanation of
the reporting requirements contained in
these proposed regulations, see part VI
of the Explanation of Provisions section.
The rest of this part II of the Special
Analyses section provides additional
details on forms and information about
the paperwork burden.
The information collection burdens
under the Paperwork Reduction Act, 44
U.S.C. 3501 et seq. (‘‘PRA’’) from the
proposed regulations are in proposed
§§ 1.250(a)–1(d), 1.250(b)–1(e)(2),
1.6038–2(f)(15), 1.6038–3(g)(4), and
1.6038A–2(b)(5)(iv).
The collection of information in
proposed § 1.250(a)–1(d) would be
mandatory for each domestic
corporation claiming a deduction under
section 250 as well as for any individual
making an election under section 962
that claims a deduction under section
250 attributable to the individual’s
GILTI. The collection of information in
proposed § 1.250(a)–1(d) is pursuant to
sections 6001 and 6011 and would be
satisfied by submitting a new reporting
form, Form 8993, ‘‘Section 250
Deduction for Foreign-Derived
Intangible Income (FDII) and Global
Intangible Low-Taxed Income (GILTI),’’
with an income tax return. For purposes
of the PRA, the reporting burden
associated with proposed § 1.250(a)–
1(d) will be reflected in the PRA
submission for new Form 8993 (OMB
control numbers 1545–0123 in the case
of business taxpayers, and 1545–0074 in
the case of individual taxpayers).
The collection of information in
proposed § 1.250(b)–1(e)(2) would
require each partnership to provide to
each of its partners the partner’s
distributive share of gross DEI, gross
FDDEI, deductions that are definitely
related to the partnership’s gross DEI
and gross FDDEI, and partnership QBAI.
For purposes of the PRA, the reporting
burden associated with proposed
§ 1.250(b)–1(e)(2) would be reflected in
the PRA submission for Form 1065
(OMB control number 1545–0123).
The collection of information in
proposed § 1.6038–2(f)(15) would
require every U.S. person that controls
PO 00000
Frm 00019
Fmt 4701
Sfmt 4702
8205
a foreign corporation during an annual
accounting period and files Form 5471,
‘‘Information Return of U.S. Persons
With Respect to Certain Foreign
Corporations,’’ for that period. The
collection of information in proposed
§ 1.6038–2(f)(15) would be satisfied by
providing information about the section
250 deduction for the corporation’s
accounting period as Form 5471 and its
instructions may prescribe. For
purposes of the PRA, the reporting
burden on the applicable business
taxpayers associated with proposed
§ 1.6038–2(f)(15) will be reflected in the
PRA submission for Form 5471 (OMB
control number 1545–0123).
The collection of information in
proposed § 1.6038–3(g)(4) would be
mandatory for every U.S. person that
controls a foreign partnership during the
partnership tax year and files Form
8865, ‘‘Return of U.S. Persons With
Respect to Certain Foreign
Partnerships,’’ for that period. The
collection of information in proposed
§ 1.6038–3(g)(4) would require a
controlling ten-percent partner or
controlling fifty-percent partner to
provide to the IRS on Form 8865 its
share of the partnership’s gross DEI,
gross FDDEI, deductions that are
definitely related to the partnership’s
gross DEI and gross FDDEI, and
partnership QBAI. For purposes of the
PRA, the reporting burden associated
with proposed § 1.6038–3(g)(4) will be
reflected in the PRA submission for
Form 8865 (OMB control number 1545–
1668).
The collection of information in
proposed § 1.6038A–2(b)(5)(iv) would
be mandatory for every reporting
corporation that files Form 5472,
‘‘Information Return of a 25% ForeignOwned U.S. Corporation or a Foreign
Corporation Engaged in a U.S. Trade or
Business,’’ for the tax year. The
collection of information in proposed
§ 1.6038A–2(b)(5)(iv) would be satisfied
by providing information about the
section 250 deduction for the tax year as
Form 5472 and its instructions may
prescribe. For purposes of the PRA, the
reporting burden associated with
proposed § 1.6038A–2(b)(5)(iv) will be
reflected in the PRA submission for
Form 5472 (OMB control number 1545–
0123).
The tax forms that will be created or
revised as a result of the information
collections in the proposed regulations,
as well as the estimated number of
respondents, are as follows:
E:\FR\FM\06MRP2.SGM
06MRP2
8206
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
RELATED NEW OR REVISED TAX FORMS
Form
Form
Form
Form
Form
8993
1065,
5471
8865
5472
.............................................................................................................................
Schedule K–1 (for corporate partners only, revision starting TY2020) .............
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
New
Revision of
existing form
✓
........................
........................
........................
........................
........................
✓
✓
✓
✓
Number of
respondents
(estimated)
75,000–350,000
15,000–45,000
10,000–20,000
<10,000
50,000–80,000
Source: RAAS:CDW and ITA
The numbers of respondents in the
Related New or Revised Tax Forms table
were estimated by the Research,
Applied Analytics and Statistics
Division (‘‘RAAS’’) of the IRS from the
Compliance Data Warehouse (‘‘CDW’’),
using tax years 2014 through 2016; as
well as based on export data from the
International Trade Administration
(‘‘ITA’’) for 2015 and 2016. Tax data for
2017 are not yet available due to
extended filing dates. Data for Form
8993 represent preliminary estimates of
the total number of taxpayers that may
be required to file the new Form 8993.
The upper bound estimate reflects the
total number of exporting companies
reported in the ITA data, as well as the
CDW-based counts of individuals
reporting related party transactions. The
lower bound estimate reflects the CDWbased counts of individual and
corporate taxpayers reporting related
party transactions. Data for each of the
Forms 1065, 5471, 5472, and 8865
represent preliminary estimates of the
total number of taxpayers that are
expected to file these revised forms
regardless of whether that taxpayer must
also file Form 8993.
The current status of the Paperwork
Reduction Act submissions related to
the tax forms that will be revised as a
result of the information collections in
the proposed regulations is provided in
the accompanying table. As described
above, the reporting burdens associated
with the information collections in the
proposed regulations are included in the
aggregated burden estimates for OMB
control numbers 1545–0123 (which
represents a total estimated burden time
for all forms and schedules for
corporations of 3.157 billion hours and
total estimated monetized costs of
$58.148 billion ($2017)), 1545–0074
(which represents a total estimated
burden time, including all other related
forms and schedules for individuals, of
1.784 billion hours and total estimated
monetized costs of $31.764 billion
($2017)), and 1545–1668 (which
represents a total estimated burden time
for all related forms and schedules for
other filers, in particular trusts and
estates, of 281,974 hours and total
estimated monetized costs of $25.107
million ($2017)). The overall burden
estimates provided for the OMB control
numbers below are aggregate amounts
that relate to the entire package of forms
associated with the applicable OMB
control number and will in the future
include, but not isolate, the estimated
burden of the tax forms that will be
created or revised as a result of the
information collections in the proposed
regulations. These numbers are
therefore unrelated to the future
calculations needed to assess the burden
imposed by the proposed regulations.
These burdens have been reported for
other regulations related to the taxation
of cross-border income and the Treasury
Department and the IRS urge readers to
recognize that these numbers are
duplicates and to guard against
overcounting the burden that
international tax provisions imposed
prior to the Act. No burden estimates
specific to the forms affected by the
proposed regulations are currently
available. The Treasury Department and
the IRS have not estimated the burden,
including that of any new information
collections, related to the requirements
under the proposed regulations. The
Treasury Department and the IRS
request comments on all aspects of
information collection burdens related
to the proposed regulations, including
estimates for how much time it would
take to comply with the paperwork
burdens described above for each
relevant form and ways for the IRS to
minimize the paperwork burden.
Form
Type of filer
OMB Number(s)
Status
Form 8993 (NEW) ................................
Business (NEW Model) ..............
1545–0123 .......
Published in the Federal Register Notice (FRN)
on 10/11/18. Public Comment period closed on
12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
Individual (NEW Model) .............
1545–0074 .......
Limited Scope submission (1040 only). Full ICR
submission for 2019 for all forms in 3/2019. 60
Day FRN not published yet for full collection
for 2019.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031.
Form 1065, Schedule K–1 ...................
Business (NEW Model) ..............
1545–0123 .......
Published in the FRN on 10/11/18. Public Comment period closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
Form 5471 ............................................
VerDate Sep<11>2014
18:44 Mar 05, 2019
Business (NEW Model) ..............
Jkt 247001
PO 00000
Frm 00020
Fmt 4701
1545–0123 .......
Sfmt 4702
Published in the FRN on 10/11/18. Public Comment period closed on 12/10/18.
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
Form
Type of filer
OMB Number(s)
8207
Status
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
Form 8865 ............................................
All other filers (mainly trusts and
estates) (Legacy system).
1545–1668 .......
Published in the FRN on 10/01/18. Public Comment period closed on 11/30/18.
Link: https://www.federalregister.gov/documents/2018/10/01/2018-21288/proposed-collection-commentrequest-for-regulation-project.
Form 5472 ............................................
Business (NEW Model) ..............
1545–0123 .......
Published in the FRN on 10/11/18. Public Comment period closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-commentrequest-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
III. Regulatory Flexibility Act
It is hereby certified that this notice
of proposed rulemaking will not have a
significant economic impact on a
substantial number of small entities
within the meaning of section 601(6) of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6). Although the Treasury
Department and the IRS project that the
proposed regulations may affect a
substantial number of small entities, the
economic impact on small entities as a
result of this notice of proposed
rulemaking is not expected to be
significant.
The small business entities that are
subject to section 250 and this notice of
proposed rulemaking are small domestic
corporations claiming a deduction
under section 250 based on their FDII
and GILTI. Pursuant to proposed
§ 1.250(a)–1(d), taxpayers are required
to file new Form 8993 to compute the
amount of the eligible deduction for
FDII and GILTI under section 250. The
Treasury Department and the IRS
estimate that there are between 75,000
and 350,000 respondents of all sizes that
are likely to file Form 8993. The lower
end estimate comes from IRS-collected
data on related party transactions that
are indicative of exports to related
parties. These data provide a lower
bound for the number of taxpayers that
export since related party exports are
only a part of total exports. The IRS
does not collect information on exports
to third parties; therefore, International
Trade Administration (‘‘ITA’’) statistics
of the number of companies engaged in
export activities are used.4 The ITA data
provide the upper bound of the estimate
of affected taxpayers. The Treasury
Department and the IRS welcome
comments on the analysis of number of
entities affected, particularly on how
such analysis should take into account
different industries. Additionally, under
4 ITA data was accessed at https://tse.export.gov/
EDB/SelectReports.aspx?DATA=ExporterDB in
December, 2018.
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
proposed § 1.250(b)–1(e), a partnership
that has one or more direct or indirect
partners that are domestic corporations
and that is required to file a return
under section 6031 must furnish on
Schedule K–1 (Form 1065) certain
information that would allow the
partner to accurately calculate its FDII.
The Treasury Department and the IRS
estimate the number of domestic
corporations that are direct or indirect
partners in a partnership affected by
proposed § 1.250(a)–1(e) is between
15,000 and 45,000.
In order to substantiate the amount of
the section 250 deduction on Form 8993
related to the calculation of FDII for the
sale of property or the provision of a
service, the proposed regulations in
§§ 1.250(b)–3 through 1.250(b)–5
prescribe different types of
documentation that should be obtained
for each transaction. As discussed in the
Explanation of Provisions section of the
preamble, the proposed regulations
provide several types of permissible
documentation for the purpose of
determining the amount of a domestic
corporation’s income that is considered
foreign-derived. For example, in the
case of a sale of general property, the
seller must (1) obtain documentation
that establishes the recipient’s status as
a foreign person, such as a written
statement by the recipient indicating
that the recipient is a foreign person;
and (2) obtain documentation that the
property is for foreign use, such as proof
of shipment of the property to a foreign
address.
To alleviate the burden of
documentation on many small
businesses and small transactions, the
proposed regulations allow a seller that
has less than $10,000,000 of gross
receipts in the prior taxable year, or less
than $5,000 in gross receipts from a
single recipient during the current
taxable year, to treat a recipient as a
foreign person if the seller has a
shipping address for the recipient that is
outside the United States. The small
PO 00000
Frm 00021
Fmt 4701
Sfmt 4702
business and small transaction
exceptions to establish foreign person
status are applicable to sales of both
general property and intangible
property. Furthermore, to establish that
general property is for a foreign use,
certain small businesses and businesses
with small transactions may rely on the
existence of a foreign shipping address
for the recipient instead of obtaining
documentation. The proposed
regulations also contain small business
and small transaction exceptions related
to general services provided to
consumers and business recipients. The
Treasury Department and the IRS
anticipate that a substantial share of
small entities claiming a section 250
deduction will qualify for the small
business and small transactions
exceptions described above, thereby
significantly reducing the overall
burden of the proposed regulations on
small entities. The Treasury Department
and the IRS solicit comments on this
issue.
The reporting burden for completing
Form 8993 is estimated to average 24
hours for all affected entities, regardless
of size. The reporting burden on small
entities (those with receipts below $10
million in RAAS calculations) is
estimated to average 15 hours. Based on
the monetized hourly burden reported
below, the annual per-entity reporting
burden will be $1,067. The Treasury
Department and the IRS project that
compliance with the documentation
requirements in the proposed
regulations will have a de minimis or
limited impact on all affected entities,
regardless of size, as the majority of
taxpayers will be able to use records
that are maintained in the normal
course of business. Small business
entities that have less than $10 million
of gross receipts in the prior taxable
year, or less than $5,000 in gross
receipts from a single recipient during
the current taxable year, are expected to
experience 0 to 5 minutes, with an
average of 2.5 minutes, of recordkeeping
E:\FR\FM\06MRP2.SGM
06MRP2
8208
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
per transaction recipient. Taxpayers
ineligible to qualify for either exception
are expected to experience 0 to 30
minutes, with an average of 15 minutes,
of recordkeeping per transaction
recipient. These hourly estimates were
derived by RAAS based the existence of
exceptions available to small
businesses, as well as based on the
previously noted overlap between
acceptable documentation and records
kept in the normal course of business,
suggesting limited impact. The hourly
estimates include all associated
activities: recordkeeping, tax planning,
learning about the law, gathering tax
materials, form completion and
submissions, and time with a tax
preparer or use of tax software. The
estimated monetized burden for
compliance is $71.14 per hour, a figure
computed from the IRS Business
Taxpayer Burden model which assigns
each firm in the micro data a
monetization rate based on total revenue
and assets reported on their tax return.
See Tax Compliance Burden (John
Guyton et al., July 2018) at https://
www.irs.gov/pub/irs-soi/d13315.pdf.
The assigned monetization rates
include, in addition to wages, employer
non-wage costs such as employment
taxes, benefits, and overhead. For these
reasons, the Treasury Department and
the IRS have determined that the
requirements in proposed §§ 1.250(a)–1
and 1.250(b)–3 through 1.250(b)–6 will
not have a significant economic impact
on a substantial number of small
entities. Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act is not
required with respect to proposed
§§ 1.250(a)–1 and 1.250(b)–3 through
1.250(b)–6.
The small business entities that are
subject to proposed § 1.6038–2(f)(15) are
domestic small business entities that are
controlling U.S. shareholders of a
foreign corporation and that claim a
deduction under section 250 by reason
of having FDII. For these purposes, a
domestic small business entity controls
a foreign corporation by owning more
than 50 percent of that foreign
corporation’s stock, measured either by
value or voting power. The data to
assess the number of small entities
potentially affected by § 1.6038–2(f)(15)
are not readily available. However,
businesses that are controlling U.S.
shareholders of a foreign corporation are
generally not small businesses because
the ownership of sufficient stock in a
foreign corporation in order to be a
controlling U.S. shareholder generally
entails significant resources and
investment. Therefore, the Treasury
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
Department and the IRS project that a
substantial number of domestic small
business entities will not be subject to
proposed § 1.6038–2(f)(15).
Consequently, the Treasury Department
and the IRS have determined that
proposed § 1.6038–2(f)(15) will not have
a significant economic impact on a
substantial number of small entities.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act is not required with
respect to the collection of information
requirements of proposed § 1.6038–
2(f)(15).
The small business entities that are
subject to proposed § 1.6038–3(g)(4) are
domestic small entities that are
controlling fifty-percent partners or
controlling ten-percent partners of a
foreign partnership and that claim a
deduction under section 250 by reason
of having FDII. A controlling fiftypercent partner is a U.S. person that
owns more than a fifty-percent interest
in a foreign partnership. A controlling
ten-percent partner is a U.S. person that
owns a ten-percent or greater interest in
a foreign partnership that is controlled
by U.S. persons owning at least a tenpercent interest. For these purposes, a
fifty percent interest or ten percent
interest in a partnership is an interest
equal to fifty percent or ten percent of
the capital or profits interest in a
partnership, or an interest to which fifty
percent or ten percent of the deductions
or losses of the partnership are
allocated, respectively. The data to
assess the number of small entities
potentially affected by proposed
§ 1.6038–3(g)(4) are not readily
available. However, businesses that are
controlling fifty-percent partners or
controlling ten-percent partners of a
foreign partnership are generally not
small businesses because the ownership
of a sufficient interest in a foreign
partnership in order to be a controlling
fifty-percent partner or a controlling tenpercent partner generally entails
significant resources and investment.
Therefore, the Treasury Department and
the IRS have determined that proposed
§ 1.6038–3(g)(4) will not affect a
substantial number of domestic small
business entities. Moreover, any
increase in costs imposed by the rule is
likely to be small, relative to total costs,
for any entity. Consequently, the
Treasury Department and the IRS have
determined that proposed § 1.6038–
3(g)(4) will not have a significant
economic impact on a substantial
number of small entities. Therefore, a
Regulatory Flexibility Analysis under
the Regulatory Flexibility Act is not
required with respect to the collection
PO 00000
Frm 00022
Fmt 4701
Sfmt 4702
of information requirements of proposed
§ 1.6038–3(g)(4).
The small business entities that are
subject to proposed § 1.6038A–
2(b)(5)(iv) are domestic small entities
that are at least 25-percent foreignowned, by vote or value, that claim a
deduction under section 250 by reason
of having FDII. The data to assess the
number of small entities potentially
affected by proposed § 1.6038A–
2(b)(5)(iv) is not readily available.
However, domestic corporations that are
at least 25-percent foreign-owned are
generally not small businesses because
a foreign person’s ownership of at least
25 percent of a domestic corporation,
whether by vote or value, generally
entails significant resources and
investment, and a foreign person is
unlikely to expend such resources to
invest in a small domestic entity.
Therefore, the Treasury Department and
the IRS project that a substantial
number of domestic small business
entities will not be subject to proposed
§ 1.6038A–2(b)(5)(iv). Consequently, the
Treasury Department and the IRS have
determined that that proposed
§ 1.6038A–2(b)(5)(iv) will not have a
significant economic impact on a
substantial number of small entities.
Therefore, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act is not required with
respect to the collection of information
requirements of proposed § 1.6038A–
2(b)(5)(iv).
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments from the public on both the
number of entities affected and the
economic impact of this proposed rule
on small entities.
Pursuant to section 7805(f) of the
Code, this notice of proposed
rulemaking has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small businesses.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a state, local, or tribal government, in
the aggregate, or by the private sector, of
$100 million in 1995 dollars, updated
annually for inflation. In 2018, that
threshold is approximately $150
million. This rule does not include any
Federal mandate that may result in
expenditures by state, local, or tribal
governments, or by the private sector in
excess of that threshold.
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order. This
proposed rule does not have federalism
implications, does not impose
substantial direct compliance costs on
state and local governments, and does
not preempt state law within the
meaning of the Executive Order.
the Internal Revenue Bulletin and are
available from the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402, or by
visiting the IRS website at https://
www.irs.gov.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written or electronic comments that are
submitted timely to the IRS as
prescribed in this preamble under the
ADDRESSES section. Comments are
requested on all aspects of the proposed
regulations. In addition, the Treasury
Department and the IRS solicit
comments regarding the appropriateness
of the numerical thresholds in the
following provisions, along with data,
other evidence, and models that can
enhance the rigor of the process by
which such thresholds are determined:
proposed § 1.250(b)–4(c)(2)(ii),
(d)(2)(iii)(C), (d)(2)(iv), (d)(3)(ii) and
(iii); proposed § 1.250(b)–5(c)(5), (c)(6),
(d)(3)(ii), (e)(3)(ii), and (h); and
proposed § 1.250(b)–6(c)(1)(ii) and
(d)(2).
All comments will be available at
https://www.regulations.gov or upon
request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written
comments. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be
published in the Federal Register.
■
Drafting Information
The principal authors of these
proposed regulations are Kenneth
Jeruchim of the Office of the Associate
Chief Counsel (International) and
Michelle A. Monroy and Austin
Diamond-Jones of the Office of
Associate Chief Counsel (Corporate).
However, other personnel from the
Treasury Department and the IRS
participated in their development.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance
cited in this document are published in
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order for §§ 1.250–1 and
1.250(a)–1 through 1.250(b)–6, revising
the entries for §§ 1.1502–12 and 1.1502–
13, and adding an entry in numerical
order for § 1.1502–50 to read in part as
follows:
Authority: 26 U.S.C. 7805.
*
*
*
*
*
Sections 1.250–1 and 1.250(a)–1 through
1.250(b)–6 also issued under 26 U.S.C.
250(c).
Sections 1.250(a)–1 and 1.250(b)–1 also
issued under 26 U.S.C. 6001 and 6011(a).
*
*
*
*
*
Section 1.1502–12 also issued under 26
U.S.C. 250(c) and 1502.
Section 1.1502–13 also issued under 26
U.S.C. 250(c) and 1502.
*
*
*
*
*
Section 1.1502–50 also issued under 26
U.S.C. 250(c) and 1502.
*
*
*
*
*
Par. 2. Sections 1.250–0, 1.250–1, and
1.250(a)–1 through 1.250(b)–6 are added
to read as follows:
■
Sec.
*
*
*
*
*
1.250–0 Table of contents.
1.250–1 Introduction.
1.250(a)–1 Deduction for foreign-derived
intangible income and global intangible
low-taxed income.
1.250(b)–1 Computation of foreign-derived
intangible income (FDII).
1.250(b)–2 Qualified business asset
investment.
1.250(b)–3 FDDEI transactions.
1.250(b)–4 FDDEI sales.
1.250(b)–5 FDDEI services.
1.250(b)–6 Related party transactions.
*
*
§ 1.250–0
*
*
*
Table of contents.
This section lists the table of contents
for §§ 1.250–1 through 1.250(b)–6.
§ 1.250–1
Introduction.
(a) Overview.
(b) Applicability dates.
PO 00000
Frm 00023
Fmt 4701
Sfmt 4702
8209
§ 1.250(a)–1 Deduction for foreign-derived
intangible income and global intangible
low-taxed income.
(a) Scope.
(b) Allowance of deduction.
(1) In general.
(2) Taxable income limitation.
(3) Reduction in deduction for taxable
years after 2025.
(4) Treatment under section 4940.
(c) Definitions.
(1) Domestic corporation.
(2) Foreign-derived intangible income.
(3) Global intangible low-taxed
income.
(4) Section 250(a)(2) amount.
(d) Reporting requirement.
(e) Determination of deduction for
consolidated groups.
(f) Examples.
§ 1.250(b)–1 Computation of foreignderived intangible income (FDII).
(a) Scope.
(b) Definition of foreign-derived
intangible income.
(c) Definitions.
(1) Controlled foreign corporation.
(2) Deduction eligible income.
(3) Deemed intangible income.
(4) Deemed tangible income return.
(5) Dividend.
(6) Domestic corporation.
(7) Domestic oil and gas extraction
income.
(8) FDDEI sale.
(9) FDDEI service.
(10) FDDEI transaction.
(11) Foreign branch income.
(12) Foreign-derived deduction
eligible income.
(13) Foreign-derived ratio.
(14) Gross DEI.
(15) Gross FDDEI.
(16) Gross non-FDDEI.
(17) Modified affiliated group.
(i) In general.
(ii) Special rule for noncorporate
entities.
(iii) Definition of control.
(18) Qualified business asset
investment.
(19) Related party.
(20) United States shareholder.
(d) Treatment of cost of goods sold
and allocation and apportionment of
deductions.
(1) Cost of goods sold for determining
gross DEI and gross FDDEI.
(2) Deductions properly allocable to
gross DEI and gross FDDEI.
(i) In general.
(ii) Determination of deductions to
allocate.
(3) Examples.
(e) Domestic corporate partners.
(1) In general.
(2) Reporting requirement for
partnership with domestic corporate
partners.
E:\FR\FM\06MRP2.SGM
06MRP2
8210
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
(3) Examples.
(f) Determination of foreign-derived
intangible income for consolidated
groups.
(g) Determination of foreign-derived
intangible income for tax-exempt
corporations.
§ 1.250(b)–2
investment.
Qualified business asset
(a) Scope.
(b) Definition of qualified business
asset investment.
(c) Specified tangible property.
(1) In general.
(2) Tangible property.
(d) Dual use property.
(1) In general.
(2) Dual use ratio.
(3) Example.
(e) Determination of adjusted basis of
specified tangible property.
(1) In general.
(2) Effect of change in law.
(3) Specified tangible property placed
in service before enactment of section
250.
(f) Special rules for short taxable
years.
(1) In general.
(2) Determination of quarter closes.
(3) Reduction of qualified business
asset investment.
(4) Example.
(g) Partnership property.
(1) In general.
(2) Definitions related to partnership
QBAI.
(i) In general.
(ii) Partnership QBAI ratio.
(iii) Partnership specified tangible
property.
(3) Determination of adjusted basis.
(4) Example.
(h) Anti-avoidance rule for certain
transfers of property.
(1) In general.
(2) Rule for structured arrangements.
(3) Per se rules for certain
transactions.
(4) Definitions related to antiavoidance rule.
(i) Disqualified period.
(ii) FDII-eligible related party.
(iii) Specified related party.
(iv) Transfer.
(5) Examples.
§ 1.250(b)–3
FDDEI transactions.
(a) Scope.
(b) Definitions.
(1) FDII filing date.
(2) Foreign person.
(3) General property.
(4) Intangible property.
(5) Recipient.
(6) Renderer.
(7) Sale.
(8) Seller.
VerDate Sep<11>2014
18:44 Mar 05, 2019
(9) United States.
(10) United States person.
(11) United States territory.
(c) Foreign military sales.
(d) Reliability of documentation.
(e) Transactions with multiple
elements.
(f) Treatment of certain loss
transactions.
(1) In general.
(2) Example.
(g) Treatment of partnerships.
(1) In general.
(2) Examples.
§ 1.250(b)–4
FDDEI sales.
(a) Scope.
(b) Definition of FDDEI sale.
(c) Foreign person.
(1) In general.
(2) Documentation of status as a
foreign person.
(i) In general.
(ii) Special rules.
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(d) Foreign use for general property.
(1) In general.
(2) Determination of foreign use.
(i) In general.
(ii) Determination of domestic use.
(iii) Determination of manufacture,
assembly, or other processing.
(A) In general.
(B) Property subject to a physical and
material change.
(C) Property incorporated into second
product as a component.
(iv) Determination of foreign use for
transportation property.
(3) Documentation of foreign use of
general property.
(i) In general.
(ii) Special rules.
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(iii) Sales of fungible mass of general
property.
(4) Examples.
(e) Foreign use for intangible
property.
(1) In general.
(2) Determination of foreign use.
(i) In general.
(ii) Sales in exchange for periodic
payments.
(iii) Sales in exchange for a lump sum.
(3) Documentation of foreign use of
intangible property.
(i) Documentation for sales for
periodic payments.
(ii) Certain sales to foreign unrelated
parties
(iii) Documentation for sales in
exchange for a lump sum.
(4) Examples.
(f) Special rule for certain financial
instruments.
§ 1.250(b)–5
FDDEI services.
(a) Scope.
Jkt 247001
PO 00000
Frm 00024
Fmt 4701
Sfmt 4702
(b) Definition of FDDEI service.
(c) Definitions.
(1) Benefit.
(2) Business recipient.
(3) Consumer.
(4) General service.
(5) Property service.
(6) Proximate service.
(7) Transportation service.
(d) General services provided to
consumers.
(1) In general.
(2) Location of consumer.
(3) Documentation of location of
consumer.
(i) In general.
(ii) Special rules
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(e) General services provided to
business recipients.
(1) In general.
(2) Location of business recipient.
(i) In general.
(A) Determination of business
operations that benefit from the service.
(B) Determination of amount of
benefit conferred on operations outside
the United States.
(ii) Location of business recipient’s
operations.
(3) Documentation of location of
business recipient.
(i) In general.
(ii) Special rules.
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(4) Related parties.
(5) Examples.
(f) Proximate services.
(g) Property services.
(h) Transportation services.
§ 1.250(b)–6
Related party transactions.
(a) Scope.
(b) Definitions.
(1) Foreign related party.
(2) Foreign unrelated party.
(3) Related party sale.
(4) Related party service.
(5) Unrelated party transaction.
(c) Related party sales.
(1) In general.
(i) Sale of property in an unrelated
party transaction.
(ii) Use of property in an unrelated
party transaction.
(2) Treatment of foreign related party
as seller or renderer.
(3) Transactions between a foreign
related party and other foreign related
parties.
(4) Example.
(d) Related party services.
(1) In general.
(2) Substantially similar services.
(3) Location of recipient of services
provided by related party.
(4) Examples.
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
§ 1.250–1
Introduction.
(a) Overview. Sections 1.250(a)–1
through 1.250(b)–6 provide rules to
determine a domestic corporation’s
section 250 deduction. Section 1.250(a)–
1 provides rules to determine the
amount of a domestic corporation’s
deduction for foreign-derived intangible
income and global intangible low-taxed
income. Section 1.250(b)–1 provides
general rules and definitions regarding
the computation of foreign-derived
intangible income. Section 1.250(b)–2
provides rules for determining a
domestic corporation’s qualified
business asset investment. Section
1.250(b)–3 provides general rules and
definitions regarding the determination
of gross foreign-derived deduction
eligible income. Section 1.250(b)–4
provides rules regarding the
determination of gross foreign-derived
deduction eligible income from the sale
of property. Section 1.250(b)–5 provides
rules regarding the determination of
gross foreign-derived deduction eligible
income from the provision of a service.
Section 1.250(b)–6 provides rules
regarding the sale of property or
provision of a service to a related party.
(b) Applicability dates. Sections
1.250(a)–1 through 1.250(b)–6 apply to
taxable years ending on or after March
4, 2019. However, for taxable years
beginning on or before March 4, 2019,
taxpayers may use any reasonable
documentation maintained in the
ordinary course of the taxpayer’s
business that establishes that a recipient
is a foreign person, property is for a
foreign use (within the meaning of
§ 1.250(b)–4(d) and (e)), or a recipient of
a general service is located outside the
United States (within the meaning of
§ 1.250(b)–5(d)(2) and (e)(2)), as
applicable, in lieu of the documentation
required in §§ 1.250(b)–4(c)(2), (d)(3),
and (e)(3) and 1.250(b)–5(d)(3) and
(e)(3), provided that such
documentation meets the reliability
requirements described in § 1.250(b)–
3(d).
§ 1.250(a)–1 Deduction for foreign-derived
intangible income and global intangible
low-taxed income.
(a) Scope. This section provides rules
for determining the amount of a
domestic corporation’s deduction for
foreign-derived intangible income and
global intangible low-taxed income.
Paragraph (b) of this section provides
general rules for determining the
amount of the deduction. Paragraph (c)
of this section provides definitions
relevant for determining the amount of
the deduction. Paragraph (d) of this
section provides reporting requirements
for a domestic corporation claiming the
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
deduction. Paragraph (e) of this section
provides a rule for determining the
amount of the deduction of a member of
a consolidated group. Paragraph (f) of
this section provides examples
illustrating the application of this
section.
(b) Allowance of deduction—(1) In
general. A domestic corporation is
allowed a deduction for any taxable year
equal to the sum of—
(i) 37.5 percent of its foreign-derived
intangible income for the year; and
(ii) 50 percent of—
(A) Its global intangible low-taxed
income for the year; and
(B) The amount treated as a dividend
received by the corporation under
section 78 which is attributable to its
global intangible low-taxed income for
the year.
(2) Taxable income limitation. In the
case of a domestic corporation with a
section 250(a)(2) amount for a taxable
year, for purposes of applying paragraph
(b)(1) of this section for the year—
(i) The corporation’s foreign-derived
intangible income for the year (if any) is
reduced (but not below zero) by an
amount that bears the same ratio to the
corporation’s section 250(a)(2) amount
that the corporation’s foreign-derived
intangible income for the year bears to
the sum of the corporation’s foreignderived intangible income and global
intangible low-taxed income for the
year; and
(ii) The corporation’s global intangible
low-taxed income for the year (if any) is
reduced (but not below zero) by the
excess of the corporation’s section
250(a)(2) amount over the amount of the
reduction described in paragraph
(b)(2)(i) of this section.
(3) Reduction in deduction for taxable
years after 2025. For any taxable year of
a domestic corporation beginning after
December 31, 2025, paragraph (b)(1) of
this section applies by substituting—
(i) 21.875 percent for 37.5 percent in
paragraph (b)(1)(i) of this section; and
(ii) 37.5 percent for 50 percent in
paragraph (b)(1)(ii) of this section.
(4) Treatment under section 4940. For
purposes of section 4940(c)(3)(A), a
deduction under section 250(a) is not
treated as an ordinary and necessary
expense paid or incurred for the
production or collection of gross
investment income.
(c) Definitions. The following
definitions apply for purposes of this
section.
(1) Domestic corporation. The term
domestic corporation has the meaning
set forth in section 7701(a), but does not
include a regulated investment
company (as defined in section 851), a
real estate investment trust (as defined
PO 00000
Frm 00025
Fmt 4701
Sfmt 4702
8211
in section 856), or an S corporation (as
defined in section 1361).
(2) Foreign-derived intangible income.
The term foreign-derived intangible
income has the meaning set forth in
§ 1.250(b)–1(b).
(3) Global intangible low-taxed
income. The term global intangible lowtaxed income means, with respect to a
domestic corporation for a taxable year,
the sum of the corporation’s GILTI
inclusion amount under § 1.951A–1(c)
for the taxable year and the
corporation’s distributive share of any
U.S. shareholder partnership’s GILTI
inclusion amount under § 1.951A–
5(b)(2).
(4) Section 250(a)(2) amount. The
term section 250(a)(2) amount means,
with respect to a domestic corporation
for a taxable year, the excess (if any) of
the sum of the corporation’s foreignderived intangible income and global
intangible low-taxed income
(determined without regard to section
250(a)(2) and paragraph (b)(2) of this
section), over the corporation’s taxable
income determined with regard to all
items of income, deduction, or loss,
except for the deduction allowed under
section 250 and this section. Therefore,
for example, a domestic corporation’s
taxable income under the previous
sentence is determined taking into
account the application of sections
163(j) and 172(a). For a corporation that
is subject to the unrelated business
income tax under section 511, taxable
income is determined only by reference
to that corporation’s unrelated business
taxable income defined under section
512.
(d) Reporting requirement. Each
domestic corporation (or individual
making an election under section 962)
that claims a deduction under section
250 for a taxable year must make an
annual return on Form 8993, ‘‘Section
250 Deduction for Foreign-Derived
Intangible Income (FDII) and Global
Intangible Low-Taxed Income (GILTI)’’
(or any successor form) for such year,
setting forth the information, in such
form and manner, as Form 8993 (or any
successor form) or its instructions
prescribe. Returns on Form 8993 (or any
successor form) for a taxable year must
be filed with the domestic corporation’s
(or in the case of a section 962 election,
the individual’s) income tax return on
or before the due date (taking into
account extensions) for filing the
corporation’s (or in the case of a section
962 election, the individual’s) income
tax return.
(e) Determination of deduction for
consolidated groups. A member of a
consolidated group (as defined in
§ 1.1502–1(h)) determines its deduction
E:\FR\FM\06MRP2.SGM
06MRP2
8212
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
under section 250(a) and this section
under the rules provided in § 1.1502–
50(b).
(f) Examples. The following examples
illustrate the application of this section.
For purposes of the examples, it is
assumed that DC is a domestic
corporation that is not a member of a
consolidated group and the taxable year
of DC begins after 2017 and before 2026.
(1) Example 1: Application of the taxable
income limitation—(i) Facts. For the taxable
year, without regard to section 250(a)(2) and
paragraph (b)(2) of this section, DC has
foreign-derived intangible income of $100x
and global intangible low-taxed income of
$300x. DC’s taxable income (without regard
to section 250(a) and this section) is $300x.
(ii) Analysis. DC has a section 250(a)(2)
amount of $100x, which is equal to the
excess of the sum of DC’s foreign-derived
intangible income and global intangible lowtaxed income of $400x ($100x + $300x) over
its taxable income of $300x. As a result, DC’s
foreign-derived intangible income and global
intangible low-taxed income are reduced, in
the aggregate, by $100x under section
250(a)(2) and paragraph (b)(2) of this section
for purposes of calculating DC’s deduction
allowed under section 250(a)(1) and
paragraph (b)(1) of this section. DC’s foreignderived intangible income is reduced by
$25x, the amount that bears the same ratio to
the section 250(a)(2) amount ($100x) as DC’s
foreign-derived intangible income ($100x)
bears to the sum of DC’s foreign-derived
intangible income and global intangible lowtaxed income ($400x). DC’s global intangible
low-taxed income is reduced by $75x, which
is the remainder of the section 250(a)(2)
amount ($100x¥$25x). Therefore, for
purposes of calculating its deduction under
section 250(a)(1) and paragraph (b)(1) of this
section, DC’s foreign-derived intangible
income is $75x ($100x¥$25x) and its global
intangible low-taxed income is $225x
($300x¥$75x). Accordingly, DC is allowed a
deduction for the taxable year under section
250(a)(1) and paragraph (b)(1) of this section
of $140.63x ($75x × 0.375 + $225x × 0.50).
(2) Example 2: Interaction of sections
163(j), 172, and 250—(i) Facts. For the
taxable year, DC has gross DEI (as defined in
§ 1.250(b)–1(c)(14)) and gross FDDEI (as
defined in § 1.250(b)–1(c)(15)) of $300x. DC
has no income for the taxable year other than
income included in gross DEI. DC also has a
net operating loss carryover to the taxable
year under section 172(b) of $130x and
business interest (as defined in section
163(j)(5), without regard to any carryforwards
described in section 163(j)(2)) of $100x.
Under § 1.250(b)–1(d)(2), all of DC’s interest
expense is allocable to gross FDDEI and the
net operating loss carryover, to the extent
absorbed in the taxable year, is allocable to
gross FDDEI. DC has no other allowable
deductions, qualified business asset
investment (as defined in § 1.250(b)–2(b)), or
global intangible low-taxed income for the
taxable year. DC has no floor plan financing
interest (as defined in section 163(j)(9)) for
the taxable year and no business interest
income (as defined in section 163(j)(6)) for
the taxable year.
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
(ii) Analysis—(A) Calculation of tentative
section 250 deduction for purposes of section
163(j). First, for purposes of applying section
163(j), the amount of the deduction allowed
to DC under section 250(a)(1) is determined
without regard to the application of section
163(j) and the section 163(j) regulations,
without regard to section 172, and without
regard to section 250(a)(2) and paragraph
(b)(2) of this section (tentative section 250
deduction). See § 1.163(j)–1(b)(37)(ii); see
also § 1.250(b)–1(d)(2)(ii). Therefore, solely
for purposes of calculating DC’s tentative
section 250 deduction, DC’s allowable
deductions under § 1.250(b)–1(d)(2)(ii) for
computing its foreign-derived intangible
income are $100x, the amount of its business
interest before the application of section
163(j). DC’s deduction eligible income (as
defined in § 1.250(b)–1(c)(2)) is $200x, the
excess of its gross DEI (as defined in
§ 1.250(b)–1(c)(14)) of $300x, over its
deductions properly allocable to gross DEI of
$100x. DC’s foreign-derived deduction
eligible income (as defined in § 1.250(b)–
1(c)(12)) is also $200x, the excess of its gross
FDDEI of $300x over its deductions properly
allocable to gross FDDEI of $100x. DC’s
foreign-derived ratio (as defined in
§ 1.250(b)–1(c)(13)) is 100%, which is the
ratio of DC’s foreign-derived deduction
eligible income of $200x to DC’s deduction
eligible income of $200x. DC’s deemed
intangible income (as defined § 1.250(b)–
1(c)(3)) is $200x, the excess of its deduction
eligible income of $200x over its qualified
business asset investment of $0. Therefore,
DC’s foreign-derived intangible income for
purposes of the tentative section 250
deduction is $200x, which is equal to DC’s
deemed intangible income of $200x
multiplied by its foreign-derived ratio of
100%. Accordingly, DC’s tentative section
250 deduction is $75x ($200x × 0.375).
(B) Calculation of disallowance under
section 163(j)(1). Second, the amount of
DC’s business interest deduction
allowed under section 163(j) is
determined taking into account the
tentative section 250 deduction, but
without regard to section 172(a). See
section 163(j)(8)(A)(iii). Under section
163(j)(1) and § 1.163(j)–2(b), DC’s
deduction for business interest is
limited to 30% of adjusted taxable
income plus the amount of any business
interest income for the taxable year and
the amount of any floor plan financing
interest for the taxable year. In this case,
DC has no business interest income or
floor plan financing interest for the
taxable year and therefore DC’s
deduction for business interest is
limited to 30% of DC’s adjusted taxable
income for the taxable year. DC’s
adjusted taxable income is equal to DC’s
taxable income with the relevant
adjustments set forth under section
163(j)(8) and the regulations under
section 163(j). For this purpose, DC’s
taxable income is computed without
regard to DC’s business interest and the
amount of any net operating loss
PO 00000
Frm 00026
Fmt 4701
Sfmt 4702
deduction under section 172, but taking
into account the tentative section 250
deduction. Taking into account the
tentative section 250 deduction, DC’s
adjusted taxable income is $225x
($300x—$75x). Therefore, the amount of
DC’s allowable deduction for business
interest is $67.5x ($225x × 0.30) and the
remaining $32.5x of DC’s business
interest expense will be carried forward
to the succeeding taxable year.
(C) Calculation of net operating loss
deduction under section 172(a). Third,
the amount of DC’s net operating loss
deduction under section 172(a) is
determined taking into account section
163(j), but without regard to section
250(a) and paragraph (b)(1) of this
section. See § 1.250(b)–1(d)(2)(ii). Under
section 172(a)(2), the amount of DC’s net
operating loss deduction is limited to
80% of taxable income. Taking into
account the allowable deduction for
business interest (but not its deduction
allowed under section 250(a)), DC’s
taxable income is $232.5x
($300x¥$67.5x), and its taxable income
limitation under section 172(a)(2) is
$186x ($232.5x × 0.80). DC is entitled to
a net operating loss deduction equal to
its entire net operating loss carryover of
$130x, because such amount is less than
$186x.
(D) Calculation of FDII. Fourth, the
amount of DC’s foreign-derived
intangible income is determined, taking
into account the deductions allowed
after the application of sections 163(j)
and 172(a). DC’s allowable deductions
under § 1.250(b)–1(d)(2)(ii) for
computing its foreign-derived intangible
income are $197.5x, which is equal to
its allowed deduction for business
interest of $67.5x plus its net operating
loss deduction of $130x. Accordingly,
DC’s deduction eligible income (as
defined in § 1.250(b)–1(c)(2)) is $102.5x,
the excess of its gross DEI (as defined in
§ 1.250(b)–1(c)(14)) of $300x, over its
deductions properly allocable to gross
DEI of $197.5x. DC’s foreign-derived
deduction eligible income (as defined in
§ 1.250(b)–1(c)(12)) is also $102.5x, the
excess of its gross FDDEI of $300x, over
its deductions properly allocable to
gross FDDEI of $197.5x. DC’s foreignderived ratio (as defined in § 1.250(b)–
1(c)(13)) is 100%, which is the ratio of
DC’s foreign-derived deduction eligible
income of $102.5x to DC’s deduction
eligible income of $102.5x. DC’s deemed
intangible income (as defined in
§ 1.250(b)–1(c)(3)) is $102.5x, the excess
of its deduction eligible income of
$102.5x over its qualified business asset
investment of $0. Accordingly, DC’s
foreign-derived intangible income
before application of section 250(a)(2)
and paragraph (b)(2) of this section is
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
$102.5x, which is equal to DC’s deemed
intangible income of $102.5x multiplied
by its foreign-derived ratio of 100%.
(E) Calculation of section 250
deduction. Finally, the amount of DC’s
deduction under section 250 is
determined after the application of
section 250(a)(2), which is applied
taking into account DC’s business
interest allowed under section 163(j)
and its net operating loss deduction
under section 172(a). DC’s taxable
income for purposes of section 250(a)(2)
and paragraph (b)(2) of this section is
$102.5x, which is $300x of gross income
minus $197.5x, which is equal to its
deduction for business interest of $67.5x
plus its net operating loss deduction of
$130x. DC does not have a section
250(a)(2) amount (as defined in
paragraph (c)(4) of this section) for the
year because DC’s foreign-derived
intangible income of $102.5x,
determined without regard to section
250(a)(2) and paragraph (b)(2) of this
section, does not exceed DC’s taxable
income of $102.5x. Therefore, the
amount of DC’s foreign-derived
intangible income is not reduced under
section 250(a)(2) and paragraph (b)(2) of
this section. Accordingly, for the taxable
year, DC is allowed a deduction under
section 250(a)(1) and paragraph (b)(1) of
this section of $38.44x ($102.5x ×
0.375).
§ 1.250(b)–1 Computation of foreignderived intangible income (FDII).
(a) Scope. This section provides rules
for computing foreign-derived
intangible income. Paragraph (b) of this
section defines foreign-derived
intangible income. Paragraph (c) of this
section provides definitions that are
relevant for computing foreign-derived
intangible income. Paragraph (d) of this
section provides rules for computing
gross income and allocating and
apportioning deductions for purposes of
computing deduction eligible income
and foreign-derived deduction eligible
income. Paragraph (e) of this section
provides rules for computing the
deduction eligible income and foreignderived deduction eligible income of a
domestic corporate partner. Paragraph
(f) of this section provides a rule for
computing the foreign-derived
intangible income of a member of a
consolidated group. Paragraph (g) of this
section provides a rule for computing
the foreign-derived intangible income of
a tax-exempt corporation.
(b) Definition of foreign-derived
intangible income. Subject to the
provisions of this section, the term
foreign-derived intangible income
means, with respect to a domestic
corporation for a taxable year, the
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
corporation’s deemed intangible income
for the year multiplied by the
corporation’s foreign-derived ratio for
the year.
(c) Definitions. This paragraph (c)
provides definitions that apply for
purposes of this section and §§ 1.250(b)2 through 1.250(b)-6.
(1) Controlled foreign corporation.
The term controlled foreign corporation
has the meaning set forth in section
957(a).
(2) Deduction eligible income. The
term deduction eligible income means,
with respect to a domestic corporation
for a taxable year, the excess (if any) of
the corporation’s gross DEI for the year,
over the deductions properly allocable
to gross DEI for the year, as determined
under paragraph (d)(2) of this section.
(3) Deemed intangible income. The
term deemed intangible income means,
with respect to a domestic corporation
for a taxable year, the excess (if any) of
the corporation’s deduction eligible
income for the year, over the
corporation’s deemed tangible income
return for the year.
(4) Deemed tangible income return.
The term deemed tangible income
return means, with respect to a domestic
corporation and a taxable year, 10
percent of the corporation’s qualified
business asset investment for the year.
(5) Dividend. The term dividend has
the meaning set forth in section 316,
and includes any amount treated as a
dividend under any other provision of
subtitle A of the Internal Revenue Code
or the regulations thereunder (for
example, under section 78, 356(a)(2),
367(b), or 1248).
(6) Domestic corporation. The term
domestic corporation has the meaning
set forth in § 1.250(a)–1(c)(1).
(7) Domestic oil and gas extraction
income. The term domestic oil and gas
extraction income means income
described in section 907(c)(1),
substituting ‘‘within the United States’’
for ‘‘without the United States.’’
(8) FDDEI sale. The term FDDEI sale
has the meaning set forth in § 1.250(b)–
4(b).
(9) FDDEI service. The term FDDEI
service has the meaning set forth in
§ 1.250(b)–5(b).
(10) FDDEI transaction. The term
FDDEI transaction means a FDDEI sale
or a FDDEI service.
(11) Foreign branch income. The term
foreign branch income means gross
income attributable to a foreign branch
of a domestic corporation or a
partnership under § 1.904–4(f)(2),
except that the term also includes any
income or gain that would not be treated
as gross income attributable to a foreign
branch under § 1.904–4(f) but that arises
PO 00000
Frm 00027
Fmt 4701
Sfmt 4702
8213
from the direct or indirect sale (as
defined in § 1.250(b)–3(b)(7)) of any
asset (other than stock) that produces
gross income attributable to a foreign
branch, including by reason of the sale
of a disregarded entity or interest in a
partnership. See also § 1.904–4(f)(2)(v)
(providing that if a principal purpose of
recording or failing to record an item of
gross income on the books and records
of a foreign branch is the avoidance of
the purposes of section 250 (in
connection with section
250(b)(3)(A)(i)(VI)), the item must be
attributed to one or more foreign
branches of the foreign branch owner in
a manner that reflects the substance of
the transaction).
(12) Foreign-derived deduction
eligible income. The term foreignderived deduction eligible income
means, with respect to a domestic
corporation for a taxable year, the excess
(if any) of the corporation’s gross FDDEI
for the year, over the deductions
properly allocable to gross FDDEI for the
year, as determined under paragraph
(d)(2) of this section.
(13) Foreign-derived ratio. The term
foreign-derived ratio means, with
respect to a domestic corporation for a
taxable year, the ratio (not to exceed
one) of the corporation’s foreign-derived
deduction eligible income for the year to
the corporation’s deduction eligible
income for the year. If a domestic
corporation has no foreign-derived
deduction eligible income for a taxable
year, the corporation’s foreign-derived
ratio is zero for the year.
(14) Gross DEI. The term gross DEI
means, with respect to a domestic
corporation or a partnership for a
taxable year, the gross income of the
corporation or partnership for the year
determined without regard to the
following items of gross income—
(i) Amounts included in gross income
under section 951(a)(1);
(ii) Global intangible low-taxed
income (as defined in § 1.250(a)–
1(c)(3));
(iii) Financial services income (as
defined in section 904(d)(2)(D) and
§ 1.904–4(e)(1)(ii));
(iv) Dividends received from a
controlled foreign corporation with
respect to which the corporation or
partnership is a United States
shareholder;
(v) Domestic oil and gas extraction
income; and
(vi) Foreign branch income.
(15) Gross FDDEI. The term gross
FDDEI means, with respect to a
domestic corporation or a partnership
for a taxable year, the portion of the
gross DEI of the corporation or
partnership for the year which is
E:\FR\FM\06MRP2.SGM
06MRP2
8214
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
derived from all of its FDDEI
transactions.
(16) Gross non-FDDEI. The term gross
non-FDDEI means, with respect to a
domestic corporation for a taxable year,
the portion of the corporation’s gross
DEI that is not included in gross FDDEI.
(17) Modified affiliated group—(i) In
general. The term modified affiliated
group means an affiliated group as
defined in section 1504(a) determined
by substituting ‘‘more than 50 percent’’
for ‘‘at least 80 percent’’ each place it
appears, and without regard to section
1504(b)(2) and (3).
(ii) Special rule for noncorporate
entities. Any person (other than a
corporation) that is controlled by one or
more members of a modified affiliated
group (including one or more persons
treated as a member or members of a
modified affiliated group by reason of
this paragraph (c)(17)(ii)) or that
controls any such member is treated as
a member of the modified affiliated
group.
(iii) Definition of control. For
purposes of paragraph (c)(17)(ii) of this
section, the term control has the
meaning set forth in section 954(d)(3).
(18) Qualified business asset
investment. The term qualified business
asset investment has the meaning set
forth in § 1.250(b)–2(b).
(19) Related party. The term related
party means, with respect to any person,
any member of a modified affiliated
group that includes such person.
(20) United States shareholder. The
term United States shareholder has the
meaning set forth in section 951(b) and
§ 1.951–1(g).
(d) Treatment of cost of goods sold
and allocation and apportionment of
deductions—(1) Cost of goods sold for
determining gross DEI and gross FDDEI.
For purposes of determining the gross
income included in gross DEI and gross
FDDEI of a domestic corporation or a
partnership, the cost of goods sold of the
corporation or partnership is attributed
to gross receipts with respect to gross
DEI or gross FDDEI under any
reasonable method. Cost of goods sold
must be attributed to gross receipts with
respect to gross DEI or gross FDDEI
regardless of whether certain costs
included in cost of goods sold can be
associated with activities undertaken in
an earlier taxable year (including a year
before the effective date of section 250).
A domestic corporation or partnership
may not segregate cost of goods sold
with respect to a particular product into
component costs and attribute those
component costs disproportionately to
gross receipts with respect to amounts
excluded from gross DEI or gross FDDEI,
as applicable.
(2) Deductions properly allocable to
gross DEI and gross FDDEI—(i) In
general. For purposes of determining a
domestic corporation’s deductions that
are properly allocable to gross DEI and
gross FDDEI, the corporation’s
deductions are allocated and
apportioned to gross DEI and gross
FDDEI under the rules of §§ 1.861–8
through 1.861–14T and 1.861–17 by
treating section 250(b) as an operative
section described in § 1.861–8(f). In
allocating and apportioning deductions
under §§ 1.861–8 through 1.861–14T
and 1.861–17, gross FDDEI and gross
non-FDDEI are treated as separate
statutory groupings. The deductions
allocated and apportioned to gross DEI
equal the sum of the deductions
allocated and apportioned to gross
FDDEI and gross non-FDDEI. All items
of gross income described in paragraphs
(c)(14)(i) through (vi) of this section are
in the residual grouping. For purposes
of this paragraph (d)(2)(i), research and
experimental expenditures are allocated
and apportioned in accordance with
§ 1.861–17 without taking into account
the exclusive apportionment rule of
§ 1.861–17(b).
(ii) Determination of deductions to
allocate. All deductions allowed to a
domestic corporation are allocated and
apportioned to gross DEI and gross
FDDEI for a taxable year under
paragraph (d)(2)(i) of this section, other
than the deduction allowed under
section 250(a) and § 1.250(a)–1(b). For
this purpose, the amount of the net
operating loss deduction under section
172(a) is determined without regard to
section 250. See also § 1.163(j)–
1(b)(37)(ii) (for purposes of determining
the limitation under section 163(j)(1),
the deduction under section 250(a)(1) is
determined without regard to the
application of section 163(j) and the
section 163(j) regulations and without
regard to the taxable income limitation
of section 250(a)(2) and § 1.250(a)–
1(b)(2)).
(3) Examples. The following example
illustrates the application of this
paragraph (d).
(i) Presumed facts. The following facts
are assumed for purposes of the
examples—
(A) DC is a domestic corporation that
is not a member of a consolidated group.
(B) All sales and services are provided
to persons that are not related parties.
(C) All sales and services to foreign
persons qualify as FDDEI transactions.
(ii) Examples.
(A) Example 1: Allocation of deductions—
(1) Facts.
For a taxable year, DC manufactures
products A and B in the United States. DC
sells products A and B and provides services
associated with products A and B to United
States and foreign persons. DC‘s qualified
business asset investment for the taxable year
is $1,000x. DC has $300x of deductible
interest expense allowed under section 163.
DC has assets with a tax book value of
$2,500x. The tax book value of DC’s assets
used to produce products A and B and
services is split evenly between assets that
produce gross FDDEI and assets that produce
gross non-FDDEI. DC has $840x of supportive
deductions, as defined in § 1.861–8(b)(3),
attributable to general and administrative
expenses incurred for the purpose of
generating the class of gross income that
consists of gross DEI. DC apportions the
$840x of deductions on the basis of gross
income in accordance with § 1.861–8T(c)(1).
For purposes of determining gross FDDEI and
gross DEI under paragraph (d)(1) of this
section, DC attributes $200x of cost of goods
sold to Product A and $400x of cost of goods
sold to Product B, and then attributes the cost
of goods sold for each product ratably
between the gross receipts of such product
sold to foreign persons and the gross receipts
of such product sold to United States
persons. The manner in which DC attributes
the cost of goods sold is a reasonable method.
DC has no other items of income, loss, or
deduction. For the taxable year, DC has the
following income tax items relevant to the
determination of its foreign-derived
intangible income:
TABLE 1 TO PARAGRAPH (D)(3)(II)(A)(1)
Product A
Gross receipts from U.S. persons ...................................................................
Gross receipts from foreign persons ...............................................................
Total gross receipts .........................................................................................
Cost of goods sold for gross receipts from U.S. persons ...............................
Cost of goods sold for gross receipts from foreign persons ...........................
Total cost of goods sold ..................................................................................
Gross income ...................................................................................................
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
PO 00000
Frm 00028
Fmt 4701
Sfmt 4702
$200x
200x
400x
100x
100x
200x
200x
Product B
$800x
800x
1,600x
200x
200x
400x
1,200x
E:\FR\FM\06MRP2.SGM
06MRP2
Services
$100x
100x
200x
0
0
0
200x
Total
$1,100x
1,100x
2,200x
300x
300x
600x
1,600x
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
8215
TABLE 1 TO PARAGRAPH (D)(3)(II)(A)(1)—Continued
Product A
Tax book value of assets used to produce products/services ........................
(2) Analysis—(i) Determination of gross
FDDEI and gross non-FDDEI. Because DC
does not have any income described in
section 250(b)(3)(A)(i)(I) through (VI) and
paragraphs (c)(14)(i) through (vi) of this
section, none of its gross income is excluded
from gross DEI. DC’s gross DEI is $1,600x
($2,200x total gross receipts less $600x total
cost of goods sold). DC’s gross FDDEI is
$800x ($1,100x of gross receipts from foreign
persons minus attributable cost of goods sold
of $300x).
(ii) Determination of foreign-derived
deduction eligible income. To calculate its
foreign-derived deduction eligible income,
DC must determine the amount of its
deductions that are allocated and
apportioned to gross FDDEI and then subtract
those amounts from gross FDDEI. DC’s
interest deduction of $300x is allocated and
apportioned to gross FDDEI on the basis of
the average total value of DC’s assets in each
grouping. DC has assets with a tax book value
of $2,500x split evenly between assets that
produce gross FDDEI and assets that produce
gross non-FDDEI. Accordingly, an interest
expense deduction of $150x is apportioned to
DC’s gross FDDEI. With respect to DC’s
supportive deductions of $840x that are
related to DC’s gross DEI, DC apportions such
deductions between gross FDDEI and gross
Product B
500x
non-FDDEI on the basis of gross income.
Accordingly, supportive deductions of $420x
are apportioned to DC’s gross FDDEI. Thus,
DC’s foreign-derived deduction eligible
income is $230x, which is equal to its gross
FDDEI of $800x less $150x of interest
expense deduction and $420x of supportive
deductions.
(iii) Determination of deemed intangible
income. DC’s deemed tangible income return
is $100x, which is equal to 10% of its
qualified business asset investment of
$1,000x. DC’s deduction eligible income is
$460x, which is equal to its gross DEI of
$1,600x less $300x of interest expense
deductions and $840x of supportive
deductions. Therefore, DC’s deemed
intangible income is $360x, which is equal to
the excess of its deduction eligible income of
$460x over its deemed tangible income
return of $100x.
(iv) Determination of foreign-derived
intangible income. DC’s foreign-derived ratio
is 50%, which is the ratio of DC’s foreignderived deduction eligible income of $230x
to DC’s deduction eligible income of $460x.
Therefore, DC’s foreign-derived intangible
income is $180x, which is equal to DC’s
deemed intangible income of $360x
multiplied by its foreign-derived ratio of
50%.
500x
Services
1,500x
Total
2,500x
(B) Example 2: Allocation of deductions
with respect to a partnership—(1) Facts—(i)
DC’s operations. DC is engaged in the
production and sale of products consisting of
two separate product groups in three-digit
Standard Industrial Classification (SIC)
Industry Groups, hereafter referred to as
Group AAA and Group BBB. All of the gross
income of DC is included in gross DEI. DC
incurs $250x of research and experimental
(R&E) expenditures in the United States that
are deductible under section 174. None of the
R&E is legally mandated as described in
§ 1.861–17(a)(4) and none is included in cost
of goods sold. For purposes of determining
gross FDDEI and gross DEI under paragraph
(d)(1) of this section, DC attributes $210x of
cost of goods sold to Group AAA products
and $900x of cost of goods sold to Group BBB
products, and then attributes the cost of
goods sold with respect to each such product
group ratably between the gross receipts with
respect to such product group sold to foreign
persons and the gross receipts with respect
to such product group not sold to foreign
persons. The manner in which DC attributes
the cost of goods sold is a reasonable method.
For the taxable year, DC has the following
income tax items relevant to the
determination of its foreign-derived
intangible income:
TABLE 2 TO (D)(3)(II)(B)(1)(i)
Group AAA
products
Gross receipts from U.S. persons ...............................................................................................
Gross receipts from foreign persons ...........................................................................................
Total gross receipts .....................................................................................................................
Cost of goods sold for gross receipts from U.S. persons ...........................................................
Cost of goods sold for gross receipts from foreign persons .......................................................
Total cost of goods sold ..............................................................................................................
Gross income ...............................................................................................................................
R&E deductions ...........................................................................................................................
(ii) PRS’s operations. In addition to its own
operations, DC is a partner in PRS, a
partnership that also produces products
described in SIC Group AAA. DC is allocated
50% of all income, gain, loss, and deductions
of PRS. During the taxable year, PRS sells
Group AAA products solely to foreign
persons, and all of its gross income is
included in gross DEI. PRS has $400 of gross
receipts from sales of Group AAA products
for the taxable year and incurs $100x of
research and experimental (R&E)
expenditures in the United States that are
deductible under section 174. None of the
R&E is legally mandated as described in
§ 1.861–17(a)(4) and none is included in cost
of goods sold. For purposes of determining
gross FDDEI and gross DEI under paragraph
(d)(1) of this section, PRS attributes $200x of
cost of goods sold to Group AAA products,
VerDate Sep<11>2014
20:58 Mar 05, 2019
Jkt 247001
and then attributes the cost of goods sold
with respect to such product group ratably
between the gross receipts with respect to
such product group sold to foreign persons
and the gross receipts with respect to such
product group not sold to foreign persons.
The manner in which PRS attributes the cost
of goods sold is a reasonable method. DC’s
distributive share of PRS taxable items is
$100x of gross income and $50x of R&E
deductions, and DC’s share of PRS’s gross
receipts from sales of Group AAA products
for the taxable year is $200x under § 1.861–
17(f)(3).
(iii) Election to use sales method to allocate
and apportion R&E. DC has elected to use the
sales method to apportion its R&E deductions
under § 1.861–17. Neither DC nor PRS
licenses or sells its intangible property to
controlled or uncontrolled corporations in a
PO 00000
Frm 00029
Fmt 4701
Sfmt 4702
$200x
100x
300x
140x
70x
210x
90x
40x
Group BBB
products
$800x
400x
1,200x
600x
300x
900x
300x
210x
Total
$1,000x
500x
1,500x
750x
370x
1,110x
390x
250x
manner that necessitates including the sales
by such corporations for purposes of
apportioning DC’s R&E deductions.
(2) Analysis—(i) Determination of gross
DEI and gross FDDEI. Under paragraph (e)(1)
of this section, DC’s gross DEI, gross FDDEI,
and deductions allocable to those amounts
include its distributive share of gross DEI,
gross FDDEI, and deductions of PRS. Thus,
DC’s gross DEI for the year is $490x ($390x
attributable to DC and $100x attributable to
DC’s interest in PRS). DC’s gross income from
sales of Group AAA products to foreign
persons is $30x ($100x of gross receipts
minus attributable cost of goods sold of
$70x). DC’s gross income from sales of Group
BBB products to foreign persons is $100x
($400x of gross receipts minus attributable
cost of goods sold of $300x). DC’s gross
FDDEI for the year is $230x ($30x from DC’s
E:\FR\FM\06MRP2.SGM
06MRP2
8216
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
sale of Group AAA products plus $100x from
DC’s sale of Group BBB products plus DC’s
distributive of PRS’s gross FDDEI of $100x).
(ii) Allocation and apportionment of R&E
deductions. To determine foreign-derived
deduction eligible income, DC must allocate
and apportion its R&E expense of $300x
($250x incurred directly by DC and $50x
incurred indirectly through DC’s interest in
PRS). In accordance with § 1.861–17, R&E
expenses are first allocated to a class of gross
income related to a three-digit SIC group
code. DC’s R&E expenses related to products
in Group AAA are $90x ($40x incurred
directly by DC and $50x incurred indirectly
through DC’s interest in PRS) and its
expenses related to Group BBB are $210x.
None of those expenses were legally
mandated by a particular country and
therefore do not require the allocation of R&E
expense solely to income arising from that
jurisdiction. The exclusive apportionment
rule in § 1.861–17(b) does not apply for
purposes of apportioning R&E to gross DEI
and gross FDDEI. See paragraph (d)(2)(i) of
this section. Accordingly, all R&E expense
attributable to a particular SIC group code is
apportioned on the basis of the amounts of
sales within that SIC group code. Total sales
within Group AAA were $500x ($300x
directly by DC and $200x attributable to DC’s
interest in PRS), $300x of which were made
to foreign persons ($100x directly by DC and
$200x attributable to DC’s interest in PRS).
Therefore, the $90x of R&E expense related
to Group AAA is apportioned $54x to gross
FDDEI ($90x × $300x/$500x) and $36x to
gross non-FDDEI ($90x × $200x/$500x). Total
sales within Group BBB were $1,200x, $400x
of which were made to foreign persons.
Therefore, the $210x of R&E expense related
to products in Group BBB is apportioned
$70x to gross FDDEI ($210x × $400x/$1,200x)
and $140x to gross non-FDDEI ($210x ×
$800x/$1,200x). Accordingly, DC’s foreignderived deduction eligible income for the tax
year is $106x ($230x gross FDDEI minus
$124x of R&E ($54x + $70x) allocated and
apportioned to gross FDDEI).
(e) Domestic corporate partners—(1)
In general. A domestic corporation’s
deduction eligible income and foreignderived deduction eligible income for a
taxable year are determined taking into
account the corporation’s share of gross
DEI, gross FDDEI, and deductions of any
partnership (whether domestic or
foreign) in which the corporation is a
direct or indirect partner. For purposes
of the preceding sentence, a domestic
corporation’s share of each such item of
a partnership is determined in
accordance with the corporation’s
distributive share of the underlying
items of income, gain, deduction, and
loss of the partnership that comprise
such amounts. See § 1.250(b)–2(g) for
rules calculating the increase to a
domestic corporation’s qualified
business asset investment by the
corporation’s share of partnership QBAI.
(2) Reporting requirement for
partnership with domestic corporate
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
partners. A partnership that has one or
more direct or indirect partners that are
domestic corporations and that is
required to file a return under section
6031 must furnish to each such partner
on or with such partner’s Schedule K–
1 (Form 1065 or any successor form) by
the due date (including extensions) for
furnishing Schedule K–1 the partner’s
share of the partnership’s gross DEI,
gross FDDEI, deductions that are
definitely related to the partnership’s
gross DEI and gross FDDEI, and
partnership QBAI (as determined under
§ 1.250(b)–2(g)) for each taxable year in
which the partnership has gross DEI,
gross FDDEI, deductions that are
definitely related to the partnership’s
gross DEI or gross FDDEI, or partnership
specified tangible property (as defined
in § 1.250(b)–2(g)(2)(iii)).
(3) Examples. The following examples
illustrate the application of this
paragraph (e).
(i) Presumed facts. The following facts
are assumed for purposes of the
examples—
(A) DC, a domestic corporation, is a
partner in PRS, a partnership.
(B) FP and FP2 are foreign persons.
(C) FC is a foreign corporation.
(D) The allocations under PRS’s
partnership agreement satisfy the
requirements of section 704.
(E) No partner of PRS is a related
party of DC.
(F) DC, PRS, and FC all use the
calendar year as their taxable year.
(G) PRS has no items of income, loss,
or deduction for its taxable year, except
the items of income described.
(ii) Examples.
(A) Example 1: Sale by partnership to
foreign person—(1) Facts. Under the terms of
the partnership agreement, DC is allocated
50% of all income, gain, loss, and deductions
of PRS. For the taxable year, PRS recognizes
$20x of gross income on the sale of general
property (as defined in § 1.250(b)–3(b)(3)) to
FP, a foreign person (as determined under
§ 1.250(b)–4(c)), for a foreign use (as
determined under § 1.250(b)–4(d)). The gross
income recognized on the sale of property is
not described in section 250(b)(3)(A)(I)
through (VI) or paragraphs (c)(14)(i) through
(vi) of this section.
(2) Analysis. PRS’s sale of property to FP
is a FDDEI sale as described in § 1.250(b)–
4(b). Therefore, the gross income derived
from the sale ($20x) is included in PRS’s
gross DEI and gross FDDEI, and DC’s share
of PRS’s gross DEI and gross FDDEI ($10x) is
included in DC’s gross DEI and gross FDDEI
for the taxable year.
(B) Example 2: Sale by partnership to
foreign person attributable to foreign
branch—(1) Facts. The facts are the same as
in paragraph (e)(3)(ii)(A)(1) of this section
(the facts in Example 1), except the income
from the sale of property to FP is attributable
to a foreign branch of PRS.
PO 00000
Frm 00030
Fmt 4701
Sfmt 4702
(2) Analysis. PRS’s sale of property to FP
is excluded from PRS’s gross DEI under
section 250(b)(3)(A)(VI) and paragraph
(c)(14)(vi) of this section. Accordingly, DC’s
share of PRS’s gross income of $10x from the
sale is not included in DC’s gross DEI or gross
FDDEI for the taxable year.
(C) Example 3: Partnership with a loss in
gross FDDEI—(1) Facts. The facts are the
same as in paragraph (e)(3)(ii)(A)(1) of this
section (the facts in Example 1), except that
in the same taxable year, PRS also sells
property to FP2, a foreign person (as
determined under § 1.250(b)–4(c)), for a
foreign use (as determined under § 1.250(b)–
4(d)). After taking into account both sales,
PRS has a gross loss of $30x.
(2) Analysis. Both the sale of property to
FP and the sale of property to FP2 are FDDEI
sales because each sale is described in
§ 1.250(b)–4(b). DC’s share of PRS’s gross loss
($15x) from the sales is included in DC’s
gross DEI and gross FDDEI.
(D) Example 4: Sale by partnership to
foreign related party of the partnership—(1)
Facts. Under the terms of the partnership
agreement, DC has 25% of the capital and
profits interest in the partnership and is
allocated 25% of all income, gain, loss, and
deductions of PRS. PRS owns 100% of the
single class of stock of FC. In the taxable
year, PRS has $20x of gain on the sale of
general property (as defined in § 1.250(b)–
3(b)(3)) to FC, and FC makes a material
physical change to the property within the
meaning of § 1.250(b)–4(d)(2)(iii) outside the
United States before selling the property to
customers in the United States. PRS satisfies
the documentation requirement of § 1.250(b)–
4(d)(3) with respect to the sale.
(2) Analysis. The sale of property by PRS
to FC is described in § 1.250(b)–4(b) without
regard to the application of § 1.250(b)–6,
since the sale is to a foreign person (as
determined under § 1.250(b)–4(c)) for a
foreign use (as determined under § 1.250(b)–
4(d)). However, FC is a foreign related party
of PRS within the meaning of section
250(b)(5)(D) and § 1.250(b)–6(b)(1), because
FC and PRS are members of a modified
affiliated group within the meaning of
paragraph (c)(17) of this section. Therefore,
the sale by PRS to FC is a related party sale
within the meaning of § 1.250(b)–6(b)(3).
Under section 250(b)(5)(C)(i) and § 1.250(b)–
6(c), because FC did not sell the property, or
use the property in connection with other
property sold or the provision of a service,
to a foreign unrelated party before the
property was subject to a domestic use, the
sale by PRS to FC is not a FDDEI sale. See
§ 1.250(b)–6(c)(1). Accordingly, the gain from
the sale ($20x) is included in PRS’s gross DEI
but not its gross FDDEI, and DC’s share of
PRS’s gain ($5x) is included in DC’s gross
DEI but not gross FDDEI. This is the result
notwithstanding that FC is not a related party
of DC because FC and DC are not members
of a modified affiliated group within the
meaning of paragraph (c)(17) of this section.
(f) Determination of foreign-derived
intangible income for consolidated
groups. A member of a consolidated
group (as defined in § 1.1502–1(h))
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
determines its foreign-derived
intangible income under the rules
provided in § 1.1502–50.
(g) Determination of foreign-derived
intangible income for tax-exempt
corporations. The foreign-derived
intangible income of a corporation that
is subject to the unrelated business
income tax under section 511 is
determined only by reference to that
corporation’s items of income, gain,
deduction, or loss, and adjusted bases in
property, that are taken into account in
computing the corporation’s unrelated
business taxable income (as defined in
section 512). For example, if a
corporation that is subject to the
unrelated business income tax under
section 511 has tangible property used
in the production of both unrelated
business income and gross income that
is not unrelated business income, only
the portion of the basis of such property
taken into account in computing the
corporation’s unrelated business taxable
income is taken into account in
determining the corporation’s qualified
business asset investment. Similarly, if
a corporation that is subject to the
unrelated business income tax under
section 511 has tangible property that is
used in both the production of gross DEI
and the production of gross income that
is not gross DEI, only the corporation’s
unrelated business income is taken into
account in determining the
corporation’s dual use ratio with respect
to such property under § 1.250(b)–
2(d)(2).
§ 1.250(b)–2
investment.
Qualified business asset
(a) Scope. This section provides
general rules for determining the
qualified business asset investment of a
domestic corporation for purposes of
determining its deemed tangible income
return under § 1.250(b)–1(c)(4).
Paragraph (b) of this section defines
qualified business asset investment.
Paragraph (c) of this section defines
tangible property and specified tangible
property. Paragraph (d) of this section
provides rules for determining the
portion of property that is specified
tangible property when the property is
used in the production of both gross DEI
and gross income that is not gross DEI.
Paragraph (e) of this section provides
rules for determining the adjusted basis
of specified tangible property. Paragraph
(f) of this section provides rules for
determining qualified business asset
investment of a domestic corporation
with a short taxable year. Paragraph (g)
of this section provides rules for
increasing the qualified business asset
investment of a domestic corporation by
reason of property owned through a
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
partnership. Paragraph (h) of this
section provides an anti-avoidance rule
that disregards certain transfers when
determining the qualified business asset
investment of a domestic corporation.
(b) Definition of qualified business
asset investment. The term qualified
business asset investment means the
average of a domestic corporation’s
aggregate adjusted bases as of the close
of each quarter of a domestic
corporation’s taxable year in specified
tangible property that is used in a trade
or business of the domestic corporation
and is of a type with respect to which
a deduction is allowable under section
167. See paragraph (f) of this section for
rules relating to the qualified business
asset investment of a domestic
corporation with a short taxable year.
(c) Specified tangible property—(1) In
general. The term specified tangible
property means, subject to paragraph (d)
of this section, tangible property used in
the production of gross DEI.
(2) Tangible property. For purposes of
paragraph (c)(1) of this section, the term
tangible property means property for
which the depreciation deduction
provided by section 167(a) is eligible to
be determined under section 168
without regard to section 168(f)(1), (2),
or (5) and the date placed in service.
(d) Dual use property—(1) In general.
In the case of tangible property (as
defined in paragraph (c)(2) of this
section) of a domestic corporation that
is used in both the production of gross
DEI and the production of gross income
that is not gross DEI in a domestic
corporation’s taxable year, the portion of
the adjusted basis in the property
treated as adjusted basis in specified
tangible property for the domestic
corporation’s taxable year is determined
by multiplying the average of the
domestic corporation’s adjusted basis in
the property by the dual use ratio with
respect to the property for the domestic
corporation’s taxable year.
(2) Dual use ratio. The term dual use
ratio means, with respect to specified
tangible property—
(i) In the case of specified tangible
property that produces directly
identifiable income for a domestic
corporation’s taxable year, the ratio of
the gross DEI produced by the property
for the taxable year to the total amount
of gross income produced by the
property for the taxable year.
(ii) In the case of specified tangible
property that does not produce directly
identifiable income for a domestic
corporation’s taxable year, the ratio of
the gross DEI of the domestic
corporation for the taxable year to the
total amount of gross income of the
PO 00000
Frm 00031
Fmt 4701
Sfmt 4702
8217
domestic corporation for the taxable
year.
(3) Example. The following example
illustrates the application of this paragraph
(d).
(i) Facts. DC, a domestic corporation, owns
a machine that produces both gross DEI and
domestic oil and gas extraction income. For
the taxable year, the machine produces gross
DEI of $750x and domestic oil and gas
extraction income of $250x. The average
adjusted basis of the machine for the taxable
year in the hands of DC is $4,000x. DC also
owns an office building for its administrative
functions with an average adjusted basis for
the taxable year of $10,000x. The office
building does not produce directly
identifiable income. DC has no other
specified tangible property. For the taxable
year, DC’s gross DEI is $2,000x and its gross
income is $5,000x.
(ii) Analysis. The machine and office
building are both property for which the
depreciation deduction provided by section
167(a) are eligible to be determined under
section 168. Therefore, under paragraph
(c)(2) of this section, the machine and office
building are tangible property. The machine
and office building are used in both the
production of gross income that is included
in gross DEI and gross income that is not
included in gross DEI, because domestic oil
and gas extraction income is an item of gross
income excluded from gross DEI under
section 250(b)(3)(A)(i)(V) and § 1.250(b)–
1(c)(14)(v). Therefore, under paragraph (d)(1)
of this section, the portion of the basis in the
machine treated as basis in specified tangible
property is equal to DC’s average basis in the
machine for the year ($4,000x), multiplied by
the dual use ratio under paragraph (d)(2)(i) of
this section (0.75), which is the proportion
that the gross DEI produced by the property
($750x) bears to the total gross income
produced with respect to the property
($1,000x). Accordingly, $3,000x ($4,000x ×
0.75) of DC’s adjusted basis in the machine
is taken into account in determining DC’s
qualified business asset investment. Under
paragraph (d)(1) of this section, the portion
of the basis in the office building treated as
basis in specified tangible property is equal
to DC’s average basis in the office building
for the year ($10,000x), multiplied by the
dual use ratio under paragraph (d)(2)(ii) of
this section (0.40), which is the ratio of DC’s
gross DEI for the taxable year ($2,000x) to
DC’s total gross income for the taxable year
($5,000x). Accordingly, $4,000x ($10,000x ×
0.40) of DC’s adjusted basis in the office
building is taken into account in determining
DC’s qualified business asset investment
under paragraph (b) of this section.
Accordingly, DC’s total qualified business
asset investment is $7,000x ($3,000x +
$4,000x).
(e) Determination of adjusted basis of
specified tangible property—(1) In
general. The adjusted basis in specified
tangible property is determined by using
the alternative depreciation system
under section 168(g), and by allocating
the depreciation deduction with respect
to such property for the domestic
E:\FR\FM\06MRP2.SGM
06MRP2
8218
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
corporation’s taxable year ratably to
each day during the period in the
taxable year to which such depreciation
relates.
(2) Effect of change in law. The
determination of adjusted basis for
purposes of paragraph (b) of this section
is made without regard to any provision
of law enacted after December 22, 2017,
unless such later enacted law
specifically and directly amends the
definition of qualified business asset
investment under section 250 or section
951A.
(3) Specified tangible property placed
in service before enactment of section
250. The adjusted basis in property
placed in service before December 22,
2017, is determined using the
alternative depreciation system under
section 168(g), as if this system had
applied from the date that the property
was placed in service.
(f) Special rules for short taxable
years—(1) In general. In the case of a
domestic corporation that has a taxable
year that is less than twelve months (a
short taxable year), the rules for
determining the qualified business asset
investment of the domestic corporation
under this section are modified as
provided in paragraphs (f)(2) and (3) of
this section with respect to the taxable
year.
(2) Determination of quarter closes.
For purposes of determining quarter
closes, in computing the qualified
business asset investment of a domestic
corporation for a short taxable year, the
quarters of the domestic corporation for
purposes of this section are the full
quarters beginning and ending within
the short taxable year (if any),
determining quarter length as if the
domestic corporation did not have a
short taxable year, plus one or more
short quarters (if any).
(3) Reduction of qualified business
asset investment. The qualified business
asset investment of a domestic
corporation for a short taxable year is
the sum of—
(i) The sum of the domestic
corporation’s aggregate adjusted bases in
specified tangible property as of the
close of each full quarter (if any) in the
domestic corporation’s taxable year
divided by four; plus
(ii) The domestic corporation’s
aggregate adjusted bases in specified
tangible property as of the close of each
short quarter (if any) in the domestic
corporation’s taxable year multiplied by
the sum of the number of days in each
short quarter divided by 365.
(4) Example. The following example
illustrates the application of this paragraph
(f).
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
(i) Facts. A, an individual, owns all of the
stock of DC, a domestic corporation. A owns
DC from the beginning of the taxable year. On
July 15 of the taxable year, A sells DC to USP,
a domestic corporation that is unrelated to A.
DC becomes a member of the consolidated
group of which USP is the common parent
and as a result, under § 1.1502–76(b)(2)(ii),
DC’s taxable year is treated as ending on July
15. USP and DC both use the calendar year
as their taxable year. DC’s aggregate adjusted
bases in specified tangible property for the
taxable year are $250x as of March 31, $300x
as of June 30, $275x as of July 15, $500x as
of September 30, and $450x as of December
31.
(ii) Analysis—(A) Determination of short
taxable years and quarters. DC has two short
taxable years during the taxable year. The
first short taxable year is from January 1 to
July 15, with two full quarters (January 1–
March 31 and April 1–June 30) and one short
quarter (July 1–July 15). The second taxable
year is from July 16 to December 31, with one
short quarter (July 16–September 30) and one
full quarter (October 1–December 31).
(B) Calculation of qualified business
asset investment for the first short
taxable year. Under paragraph (f)(2) of
this section, for the first short taxable
year, DC has three quarter closes (March
31, June 30, and July 15). Under
paragraph (f)(3) of this section, the
qualified business asset investment of
DC for the first short taxable year is
$148.80x, the sum of $137.50x (($250x
+ $300x)/4) attributable to the two full
quarters and $11.30x ($275x × 15/365)
attributable to the short quarter.
(C) Calculation of qualified business
asset investment for the second short
taxable year. Under paragraph (f)(2) of
this section, for the second short taxable
year, DC has two quarter closes
(September 30 and December 31). Under
paragraph (f)(3) of this section, the
qualified business asset investment of
DC for the second short taxable year is
$217.98x, the sum of $112.50x ($450x/
4) attributable to the one full quarter
and $105.48x ($500x × 77/365)
attributable to the short quarter.
(g) Partnership property—(1) In
general. For purposes of paragraph (b) of
this section, if a domestic corporation
holds an interest in one or more
partnerships as of the close of the
domestic corporation’s taxable year, the
qualified business asset investment of
the domestic corporation for its taxable
year is increased by the sum of the
domestic corporation’s partnership
QBAI with respect to each partnership
for the domestic corporation’s taxable
year.
(2) Definitions related to partnership
QBAI—(i) In general. The term
partnership QBAI means the sum of the
domestic corporation’s share of the
partnership’s adjusted basis in
partnership specified tangible property
PO 00000
Frm 00032
Fmt 4701
Sfmt 4702
as of the close of a partnership taxable
year that ends with or within a domestic
corporation’s taxable year. A domestic
corporation’s share of the partnership’s
adjusted basis in partnership specified
tangible property is determined
separately with respect to each
partnership specified tangible property
of the partnership by multiplying the
partnership’s adjusted basis in the
property by the partnership QBAI ratio
with respect to the property. If the
partnership’s taxable year is less than
twelve months, the principles of
paragraph (f) of this section apply in
determining a domestic corporation’s
partnership QBAI with respect to the
partnership.
(ii) Partnership QBAI ratio. The term
partnership QBAI ratio means, with
respect to partnership specified tangible
property—
(A) In the case of partnership
specified tangible property that
produces directly identifiable income
for a partnership taxable year, the ratio
of the domestic corporation’s
distributive share of the gross income
produced by the property for the
partnership taxable year that is included
in the gross DEI of the domestic
corporation for its taxable year to the
total gross income produced by the
property for the partnership taxable
year.
(B) In the case of partnership
specified tangible property that does not
produce directly identifiable income for
a partnership taxable year, the ratio of
the domestic corporation’s distributive
share of the gross income of the
partnership for the partnership taxable
year that is included in the gross DEI of
the domestic corporation for its taxable
year to the total amount of gross income
of the partnership for the partnership
taxable year.
(iii) Partnership specified tangible
property. The term partnership specified
tangible property means tangible
property (as defined in paragraph (c)(2)
of this section) of a partnership that is—
(A) Used in the trade or business of
the partnership;
(B) Of a type with respect to which a
deduction is allowable under section
167; and
(C) Used in the production of gross
DEI.
(3) Determination of adjusted basis.
For purposes of this paragraph (g), a
partnership’s adjusted basis in
partnership specified tangible property
is determined based on the average of
the partnership’s adjusted basis in the
property as of the close of each quarter
in the partnership taxable year. The
principles of paragraphs (e) and (h) of
this section apply for purposes of
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
determining a partnership’s adjusted
basis in partnership specified tangible
property and the portion of such
adjusted basis taken into account in
determining a domestic corporation’s
partnership QBAI.
(4) Example. The following example
illustrates the rules of this paragraph (g).
(i) Facts. DC, a domestic corporation, is a
partner in PRS. Both DC and PRS use the
calendar year as their taxable year. PRS owns
two assets, Asset A and Asset B, both of
which are tangible property used in PRS’s
trade or business that it depreciates under
section 168. Asset A and Asset B are used
solely in the production of gross DEI. The
average of PRS’s adjusted basis as of the close
of each quarter of PRS’s taxable year in Asset
A is $100x, and the average of PRS’s adjusted
basis as of the close of each quarter of PRS’s
taxable year in Asset B is $50x. Asset A
produces $10x of directly identifiable gross
income for the taxable year, and Asset B
produces $50x of directly identifiable gross
income for the taxable year. DC’s distributive
share of the gross income from Asset A is $8x
and its distributive share of the gross income
from Asset B is $10x. DC’s entire distributive
share of income from Asset A and Asset B
is included in DC’s gross DEI for the taxable
year. See § 1.250(b)–1(e)(1). DC’s distributive
share satisfies the requirements of section
704(b).
(ii) Analysis. Each of Asset A and Asset B
is partnership specified tangible property
because each is tangible property, of a type
with respect to which a deduction is
allowable under section 167, used in PRS’s
trade or business, and used in the production
of gross DEI. DC’s partnership QBAI ratio for
Asset A is 80%, the ratio of DC’s distributive
share of the gross income from Asset A for
the taxable year that is included in DC’s gross
DEI ($8x) to the total gross income produced
by Asset A for the taxable year ($10x). DC’s
partnership QBAI ratio for Asset B is 20%,
the ratio of DC’s distributive share of the
gross income from Asset B for the taxable
year that is included in DC’s gross DEI ($10x)
to the total gross income produced by Asset
B for the taxable year ($50x). DC’s share of
the average of PRS’s adjusted basis of Asset
A is $80x, PRS’s adjusted basis in Asset A
of $100x multiplied by DC’s partnership
QBAI ratio for Asset A of 80%. DC’s share
of the average of PRS’s adjusted basis of
Asset B is $10x, PRS’s adjusted basis in Asset
B of $50x multiplied by DC’s partnership
QBAI ratio for Asset B of 20%. Therefore,
DC’s partnership QBAI with respect to PRS
is $90x ($80x + $10x). Accordingly, under
paragraph (g)(1) of this section, DC increases
its qualified business asset investment for the
taxable year by $90x.
(h) Anti-avoidance rule for certain
transfers of property—(1) In general. If,
with a principal purpose of decreasing
the amount of its deemed tangible
income return, a domestic corporation
transfers specified tangible property
(transferred property) to a specified
related party of the domestic
corporation and, within the disqualified
period, the domestic corporation or an
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
FDII-eligible related party of the
domestic corporation leases the same or
substantially similar property from any
specified related party, then, solely for
purposes of determining the qualified
business asset investment of the
domestic corporation under paragraph
(b) of this section, the domestic
corporation is treated as owning the
transferred property from the later of the
beginning of the term of the lease or
date of the transfer of the property until
the earlier of the end of the term of the
lease or the end of the recovery period
of the property.
(2) Rule for structured arrangements.
For purposes of paragraph (h)(1) of this
section, a transfer of specified tangible
property to a person that is not a related
party or lease of property from a person
that is not a related party is treated as
a transfer to or lease from a specified
related party if the transfer or lease is
pursuant to a structured arrangement. A
structured arrangement exists only if
either paragraph (h)(2)(i) or (ii) of this
section is satisfied.
(i) The reduction in the domestic
corporation’s deemed tangible income
return is a material factor in the pricing
of the arrangement with the transferee.
(ii) Based on all the facts and
circumstances, the reduction in the
domestic corporation’s deemed tangible
income return is a principal purpose of
the arrangement. Facts and
circumstances that indicate the
reduction in the domestic corporation’s
deemed tangible income return is a
principal purpose of the arrangement
include—
(A) Marketing the arrangement as taxadvantaged where some or all of the tax
advantage derives from the reduction in
the domestic corporation’s deemed
tangible income return;
(B) Primarily marketing the
arrangement to domestic corporations
which earn foreign-derived deduction
eligible income;
(C) Features that alter the terms of the
arrangement, including the return, in
the event the reduction in the domestic
corporation’s deemed tangible income
return is no longer relevant; or
(D) A below-market return absent the
tax effects or benefits resulting from the
reduction in the domestic corporation’s
deemed tangible income return.
(3) Per se rules for certain
transactions. For purposes of paragraph
(h)(1) of this section, a transfer of
property by a domestic corporation to a
specified related party (including a
party deemed to be a specified related
party under paragraph (h)(2) of this
section) followed by a lease of the same
or substantially similar property by the
domestic corporation or an FDII-eligible
PO 00000
Frm 00033
Fmt 4701
Sfmt 4702
8219
related party from a specified related
party (including a party deemed to be a
specified related party under paragraph
(h)(2) of this section) is treated per se as
occurring pursuant to a principal
purpose of decreasing the amount of the
domestic corporation’s deemed tangible
income return if both the transfer and
the lease occur within a six-month
period.
(4) Definitions related to antiavoidance rule. The following
definitions apply for purpose of this
paragraph (h).
(i) Disqualified period. The term
disqualified period means, with respect
to a transfer, the period beginning one
year before the date of the transfer and
ending the earlier of the end of the
remaining recovery period (under the
system described in section
951A(d)(3)(A)) of the property or one
year after the date of the transfer.
(ii) FDII-eligible related party. The
term FDII-eligible related party means,
with respect to a domestic corporation,
a member of the same consolidated
group as the domestic corporation or a
partnership with respect to which at
least 80 percent of the interests in
partnership capital and profits are
owned, directly or indirectly, by the
domestic corporation or one or more
members of the consolidated group that
includes the domestic corporation.
(iii) Specified related party. The term
specified related party means, with
respect to a domestic corporation, a
related party (as defined in § 1.250(b)–
1(c)(19)) other than an FDII-eligible
related party.
(iv) Transfer. The term transfer means
any disposition, exchange, contribution,
or distribution of property, and includes
an indirect transfer. For example, a
transfer of an interest in a partnership
is treated as a transfer of the assets of
the partnership. In addition, if
paragraph (h)(1) of this section applies
to treat a domestic corporation as
owning specified tangible property by
reason of a lease of the property, the
termination or lapse of the lease of the
property is treated as a transfer of the
property by the domestic corporation to
the lessor.
(5) Examples. The following examples
illustrate the application of this
paragraph (h).
(i) Example 1: Sale-leaseback with a
related party—(A) Facts. DC, a domestic
corporation, owns Asset A, which is
specified tangible property. DC also owns all
the single class of stock of DS, a domestic
corporation, and FS1 and FS2, each a
controlled foreign corporation. DC and DS
are members of the same consolidated group.
On January 1, Year 1, DC sells Asset A to
FS1. At the time of the sale, Asset A had a
E:\FR\FM\06MRP2.SGM
06MRP2
8220
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
remaining recovery period of 10 years under
the alternative depreciation system. On
February 1, Year 1, FS2 leases Asset B, which
is substantially similar to Asset A, to DS for
a five-year term ending on January 31, Year
6.
(B) Analysis. Because DC transfers
specified tangible property (Asset A), to a
specified related party of DC (FS1), and,
within a six month period (January 1, Year
1 to February 1, Year 1), an FDII-eligible
related party of DC (DS) leases a substantially
similar property (Asset B), DC’s transfer of
Asset A and lease of Asset B are treated as
per se occurring pursuant to a principal
purpose of decreasing the amount of its
deemed tangible income return. Accordingly,
for purposes of determining DC’s qualified
business asset investment, DC is treated as
owning Asset A from February 1, Year 1, the
later of the date of the transfer of Asset A
(January 1, Year 1) and the beginning of the
term of the lease of Asset B (February 1, Year
1), until January 31, Year 6, the earlier of the
end of the term of the lease of Asset B
(January 31, Year 6) or the remaining
recovery period of Asset A (December 31,
Year 10).
(ii) Example 2: Sale-leaseback with a
related party; lapse of initial lease—(A)
Facts. The facts are the same as in paragraph
(h)(5)(i)(A) of this section (the facts in
Example 1). In addition, DS allows the lease
of Asset B to expire on February 1, Year 6.
On June 1, Year 6, DS and FS2 renew the
lease for a five-year term ending on May 31,
Year 11.
(B) Analysis. Because DC is treated as
owning Asset A under paragraph (h)(1) of
this section, the lapse of the lease of Asset
B is treated as a transfer of Asset A to FS2
on February 1, Year 6, under paragraph
(h)(4)(iv) of this section. Further, because DC
is deemed to transfer specified tangible
property (Asset A) to a specified related party
(FS2) upon the lapse of the lease, and within
a six month period (February 1, Year 6 to
June 1, Year 6), an FDII-eligible related party
of DC (DS) leases a substantially similar
property (Asset B), DC’s deemed transfer of
Asset A under paragraph (h)(4)(iv) of this
section and lease of Asset B are treated as per
se occurring pursuant to a principal purpose
of decreasing the amount of its deemed
tangible income return. Accordingly, for
purposes of determining DC’s qualified
business asset investment, DC is treated as
owning Asset A from June 1, Year 6, the later
of the date of the deemed transfer of Asset
A (February 1, Year 6) and the beginning of
the term of the lease of Asset B (June 1, Year
6), until December 31, Year 10, the earlier of
the end of the term of the lease of Asset B
(May 31, Year 11) or the remaining recovery
period of Asset A (December 31, Year 10).
§ 1.250(b)–3
FDDEI transactions.
(a) Scope. This section provides rules
related to the determination of whether
a sale of property or provision of a
service is a FDDEI transaction.
Paragraph (b) of this section provides
definitions related to the determination
of whether a sale of property or
provision of a service is a FDDEI
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
transaction. Paragraph (c) of this section
provides rules regarding a sale of
property or provision of a service to a
foreign government or an international
organization. Paragraph (d) of this
section provides rules for determining
the reliability of documentation.
Paragraph (e) of this section provides a
rule for characterizing a transaction
with both sales and services elements.
Paragraph (f) of this section provides a
rule for treating certain loss transactions
as FDDEI transactions. Paragraph (g) of
this section provides a rule for
determining whether a sale of property
or provision of a service to a partnership
is a FDDEI transaction.
(b) Definitions. This paragraph (b)
provides definitions that apply for
purposes of this section and
§§ 1.250(b)–4 through 1.250(b)–6.
(1) FDII filing date. The term FDII
filing date means, with respect to a sale
of property by a seller or provision of a
service by a renderer, the date,
including extensions, by which the
seller or renderer is required to file an
income tax return (or in the case of a
seller or renderer that is a partnership,
a return of partnership income) for the
taxable year in which the gross income
from the sale of property or provision of
a service is included in the gross income
of the seller or renderer.
(2) Foreign person. The term foreign
person means a person that is not a
United States person, and includes a
foreign government or an international
organization.
(3) General property. The term general
property means any property other
than—
(i) Intangible property;
(ii) A security (as defined in section
475(c)(2)); or
(iii) A commodity (as defined in
section 475(e)(2)(B) through (D)).
(4) Intangible property. The term
intangible property has the meaning set
forth in section 367(d)(4).
(5) Recipient. The term recipient
means a person that purchases property
or services from a seller or renderer.
(6) Renderer. The term renderer
means a person that provides a service
to a recipient.
(7) Sale. The term sale means any
sale, lease, license, exchange, or
disposition of property, and includes
any transfer of property in which gain
or income is recognized under section
367.
(8) Seller. The term seller means a
person that sells property to a recipient.
(9) United States. The term United
States has the meaning set forth in
section 7701(a)(9), as expanded by
section 638(1) with respect to mines, oil
PO 00000
Frm 00034
Fmt 4701
Sfmt 4702
and gas wells, and other natural
deposits.
(10) United States person. The term
United States person has the meaning
set forth in section 7701(a)(30), except
that the term does not include an
individual that is a bona fide resident of
a United States territory within the
meaning of section 937(a).
(11) United States territory. The term
United States territory means American
Samoa, Guam, the Northern Mariana
Islands, Puerto Rico, or the U.S. Virgin
Islands.
(c) Foreign military sales. For
purposes of determining whether a sale
of property or a provision of a service
is a FDDEI transaction, if a sale of
property or a provision of a service is
made to the United States or an
instrumentality thereof pursuant to 22
U.S.C. 2751 et seq. under which the
United States or an instrumentality
thereof purchases the property or
service for resale or on-service, on
commercial terms, to a foreign
government or agency or
instrumentality thereof, and the contract
between the seller or renderer and the
United States or an instrumentality
thereof provides that the sale or service
is purchased for resale or on-service to
such foreign government or agency or
instrumentality thereof, then the sale of
property or provision of a service is
treated as a sale of property or a
provision of a service to the foreign
government.
(d) Reliability of documentation. For
purposes of the documentation
requirements described in §§ 1.250(b)–4
through 1.250(b)–6, documentation is
reliable only if each of the requirements
described in paragraphs (d)(1) through
(3) of this section is satisfied.
(1) As of the FDII filing date, the seller
or renderer does not know and does not
have reason to know that the
documentation is unreliable or
incorrect. For this purpose, a seller or
renderer has reason to know that
documentation is unreliable or incorrect
if its knowledge of all the relevant facts
or statements contained in the
documentation is such that a reasonably
prudent person in the position of the
seller or renderer would question the
accuracy or reliability of the
documentation.
(2) The documentation is obtained by
the seller or renderer by the FDII filing
date with respect to the sale or service.
(3) The documentation is obtained no
earlier than one year before the date of
the sale or service.
(e) Transactions with multiple
elements. If a transaction includes both
a sale component and a service
component, the transaction is classified
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
according to the overall predominant
character of the transaction for purposes
of determining whether the transaction
is subject to § 1.250(b)–4 or § 1.250(b)–
5.
(f) Treatment of certain loss
transactions—(1) In general. If a seller
knows or has reason to know that
property is sold to a foreign person for
a foreign use (within the meaning of
§ 1.250(b)–4(d)(2) or (e)(2)) or a renderer
knows or has reason to know that a
general service (as defined in § 1.250(b)–
5(c)(4)) is provided to a person located
outside the United States (within the
meaning of § 1.250(b)–5(d)(2) or (e)(2)),
but the seller or renderer does not
satisfy the documentation requirements
described in § 1.250(b)–4(c)(2), (d)(3), or
(e)(3) or § 1.250(b)–5(d)(3) or (e)(3), as
applicable, the transaction is deemed to
be a FDDEI transaction with respect to
a domestic corporation if not treating
the transaction as a FDDEI transaction
would increase the amount of the
corporation’s foreign-derived deduction
eligible income for the taxable year
relative to its foreign-derived deduction
eligible income that would be
determined if the transaction were
treated as a FDDEI transaction. If a seller
or renderer engages in more than one
transaction described in the preceding
sentence in a taxable year, the previous
sentence applies by comparing the
corporation’s foreign-derived deduction
eligible income if each such transaction
were not treated as a FDDEI transaction
to its foreign-derived deduction eligible
income if each such transaction were
treated as a FDDEI transaction.
(2) Example. The following example
illustrates the application of this paragraph
(f).
8221
(i) Facts. During a taxable year, DC, a
domestic corporation, manufactures products
A and B in the United States. DC sells
product A for $200x and product B for $800x.
DC knows or has reason to know that all of
its sales of product A and product B are to
foreign persons for a foreign use. DC
establishes that its sales of product B are to
foreign persons for a foreign use but does not
obtain documentation establishing that any
sales of product A are to foreign person for
a foreign use. DC’s cost of goods sold is
$450x. For purposes of determining gross
FDDEI, under § 1.250(b)–1(d)(1) DC attributes
$250x of cost of goods sold to product A and
$200x of cost of goods sold to product B, and
then attributes the cost of goods sold for each
product ratably between the gross receipts of
such product sold to foreign persons and the
gross receipts of such product not sold to
foreign persons. The manner in which DC
attributes the cost of goods sold is a
reasonable method. DC has no other items of
income, loss, or deduction.
TABLE 1 TO PARAGRAPH (f)(2)(i)
Product A
Gross receipts ..............................................................................................................................
Cost of Goods Sold .....................................................................................................................
Gross Income (Loss) ...................................................................................................................
(ii) Analysis. By not treating the sales of
product A as FDDEI sales, the amount of DC’s
foreign-derived deduction eligible income
would increase by $50x relative to its foreignderived deduction eligible income if the sales
of product A were treated as FDDEI sales.
Accordingly, because DC knows or has
reason to know that its sales of product A are
to foreign persons for a foreign use, the sales
of product A constitute FDDEI sales under
paragraph (f)(1) of this section, and thus the
$50x loss from the sale of product A is
included in DC’s gross FDDEI.
(g) Treatment of partnerships—(1) In
general. For purposes of determining
whether a sale of property to or by a
partnership or a provision of a service
to or by a partnership is a FDDEI
transaction, a partnership is treated as a
person. Accordingly, for example, a
partnership may be a seller, renderer,
recipient, or related party, including a
foreign related party (as defined in
§ 1.250(b)–6(b)(1)).
(2) Examples. The following examples
illustrate the application of this
paragraph (g).
(i) Example 1: Domestic partner sale to
foreign partnership with a foreign branch—
(A) Facts. DC, a domestic corporation, is a
partner in PRS, a foreign partnership. DC and
PRS are not related parties. PRS has a foreign
branch within the meaning of § 1.904–
4(f)(3)(iii). DC and PRS both use the calendar
year as their taxable year. For the taxable
year, DC recognizes $20x of gain on the sale
of general property to PRS for a foreign use
(as determined under § 1.250(b)–4(d)). During
the same taxable year, PRS recognizes an
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
additional $20x of gain on the sale of the
property to a foreign person for a foreign use
(as determined under § 1.250(b)–4(d)). PRS’s
income on the sale of the property is
attributable to its foreign branch.
(B) Analysis. DC’s sale of property to PRS,
a foreign partnership, is a FDDEI sale because
it is a sale to a foreign person for a foreign
use. Therefore, DC’s gain of $20x on the sale
to PRS is included in DC’s gross DEI and
gross FDDEI. However, PRS’s gain of $20x is
not included in the gross DEI or gross FDDEI
of PRS because the gain is foreign branch
income within the meaning of § 1.250(b)–
1(c)(11). Accordingly, none of PRS’s gain on
the sale of property is included in DC’s gross
DEI or gross FDDEI under § 1.250(b)–1(e)(1).
(ii) Example 2: Domestic partner sale to
domestic partnership without a foreign
branch—(A) Facts. The facts are the same as
in paragraph (g)(2)(i)(A) of this section (the
facts in Example 1), except PRS is a domestic
partnership that does not have a foreign
branch within the meaning of § 1.904–
4(f)(3)(iii).
(B) Analysis. DC’s sale of property to PRS,
a domestic partnership, is not a FDDEI sale
because the sale is to a United States person.
Therefore, the gross income from DC’s sale to
PRS is included in DC’s gross DEI, but is not
included in its gross FDDEI. However, PRS’s
subsequent sale is a FDDEI sale, and
therefore the gain of $20x is included in the
gross DEI and gross FDDEI of PRS.
Accordingly, DC includes its distributive
share of PRS’s gain from the sale in
determining DC’s gross DEI and gross FDDEI
for the taxable year under § 1.250(b)–1(e)(1).
PO 00000
Frm 00035
Fmt 4701
Sfmt 4702
Product B
$200x
250x
(50x)
§ 1.250(b)–4
$800x
200x
600x
Total
$1,000x
450x
550x
FDDEI sales.
(a) Scope. This section provides rules
for determining whether a sale of
property is a FDDEI sale. Paragraph (b)
of this section defines a FDDEI sale.
Paragraph (c) of this section provides
rules for determining whether a
recipient is a foreign person. Paragraph
(d) of this section provides rules for
determining whether general property is
sold for a foreign use. Paragraph (e) of
this section provides rules for
determining whether intangible
property is sold for a foreign use.
Paragraph (f) of this section provides a
special rule for the sale of certain
financial instruments.
(b) Definition of FDDEI sale. Except as
provided in § 1.250(b)–6(c), the term
FDDEI sale means a sale of general
property or intangible property to a
foreign person (as determined under
paragraph (c) of this section) for a
foreign use (as determined under
paragraphs (d) and (e) of this section).
(c) Foreign person—(1) In general. A
recipient is a foreign person for
purposes of paragraph (b) of this section
only if the seller establishes that the
recipient is a foreign person by
obtaining the documentation described
in paragraph (c)(2) of this section
(which meets the reliability
requirements described in § 1.250(b)–
3(d)) and, as of the FDII filing date, the
seller does not know or have reason to
E:\FR\FM\06MRP2.SGM
06MRP2
8222
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
know that the recipient is not a foreign
person.
(2) Documentation of status as a
foreign person—(i) In general. Except as
provided in paragraph (c)(2)(ii) of this
section, a seller establishes the status of
a recipient as a foreign person by
obtaining one or more of the following
types of documentation with respect to
the person—
(A) A written statement by the
recipient that the recipient is a foreign
person;
(B) With respect to a recipient that is
an entity, documentation that
establishes that the entity is organized
or created under the laws of a foreign
jurisdiction;
(C) With respect to an individual, any
valid identification issued by a foreign
government or an agency thereof that is
typically used for identification
purposes;
(D) Documents filed with a
government or an agency or
instrumentality thereof that provide the
foreign jurisdiction of organization or
residence of an entity (for example, a
publicly traded corporation’s annual
report filed with the U.S. Securities and
Exchange Commission that includes the
jurisdiction of organization or residence
of foreign subsidiaries of the
corporation); or
(E) Any other forms of documentation
as prescribed by the Secretary in forms,
instructions, or other guidance.
(ii) Special rules—(A) Special rule for
small businesses. A seller that receives
less than $10,000,000 in gross receipts
during a prior taxable year establishes
the status of any recipient as a foreign
person for a taxable year if the seller’s
shipping address for the recipient is
outside the United States. If the seller’s
prior taxable year was less than 12
months (a short period), gross receipts
are annualized by multiplying the gross
receipts for the short period by 365 and
dividing the result by the number of
days in the short period.
(B) Special rule for small transactions.
A seller that receives less than $5,000 in
gross receipts during a taxable year from
a recipient establishes the status of such
recipient as a foreign person for such
taxable year if the seller’s shipping
address for the recipient is outside the
United States.
(d) Foreign use for general property—
(1) In general. The sale of general
property is for a foreign use only if the
seller establishes that the property is for
a foreign use within the meaning of
paragraph (d)(2) of this section by
obtaining the documentation described
in paragraph (d)(3) of this section
(which meets the reliability
requirements described in § 1.250(b)–
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
3(d)) and, as of the FDII filing date, the
seller does not know or have reason to
know that the property is not for a
foreign use within the meaning of
paragraph (d)(2) of this section.
(2) Determination of foreign use—(i)
In general. Except as provided in
paragraph (d)(2)(iv) of this section, the
sale of general property is for a foreign
use if—
(A) The property is not subject to a
domestic use within three years of the
date of delivery; or
(B) The property is subject to
manufacture, assembly, or other
processing outside the United States
before the property is subject to a
domestic use.
(ii) Determination of domestic use.
General property is subject to domestic
use if—
(A) The property is subject to any use,
consumption, or disposition within the
United States; or
(B) The property is subject to
manufacture, assembly, or other
processing within the United States.
(iii) Determination of manufacture,
assembly, or other processing—(A) In
general. General property is subject to
manufacture, assembly, or other
processing only if the property is
physically and materially changed (as
described in paragraph (d)(2)(iii)(B) of
this section) or the property is
incorporated as a component into a
second product (as described in
paragraph (d)(2)(iii)(C) of this section).
(B) Property subject to a physical and
material change. For purposes of
paragraph (d)(2)(iii)(A) of this section,
the determination of whether general
property is subject to a physical and
material change is made based on all the
relevant facts and circumstances.
However, general property is not
considered subject to physical and
material change if it is subject only to
minor assembly, packaging, or labeling.
(C) Property incorporated into second
product as a component. For purposes
of paragraph (d)(2)(iii)(A) of this section,
general property is treated as a
component incorporated into a second
product only if the fair market value of
such property when it is delivered to
the recipient constitutes no more than
20 percent of the fair market value of the
second product, determined when the
second product is completed. For
purposes of the preceding sentence, all
general property that is sold by the
seller and incorporated into the second
product is treated as a single item of
property.
(iv) Determination of foreign use for
transportation property. In the case of
aircraft, railroad rolling stock, vessel,
motor vehicle, or similar property that
PO 00000
Frm 00036
Fmt 4701
Sfmt 4702
provides a mode of transportation and is
capable of traveling internationally
(international transportation property),
such property is for a foreign use only
if, during the three year period from the
date of delivery, the property is located
outside the United States more than 50
percent of the time and more than 50
percent of the miles traversed in the use
of the property are traversed outside the
United States. For purposes of the
preceding sentence, international
transportation property is deemed to be
within the United States at all times
during which it is engaged in transport
between any two points within the
United States, except where the
transport constitutes uninterrupted
international air transportation within
the meaning of section 4262(c)(3) and
the regulations under that section
(relating to tax on air transportation of
persons).
(3) Documentation of foreign use of
general property—(i) In general. Except
as provided in paragraphs (d)(3)(ii) and
(iii) of this section, a seller establishes
that general property, or a portion of a
particular class of fungible general
property, is for a foreign use only if the
seller obtains one or more of the
following types of documentation with
respect to the sale—
(A) A written statement from the
recipient or a related party of the
recipient that the recipient’s use or
intended use of the property is for a
foreign use (within the meaning of
paragraph (d)(2) of this section);
(B) A binding contract between the
seller and the recipient which provides
that the recipient’s use or intended use
of the property is for a foreign use
(within the meaning of paragraph (d)(2)
of this section);
(C) Except in the case of international
transportation property, documentation
of shipment of the general property
(including both property located within
the United States or outside the United
States, such as in a warehouse, storage
facility, or assembly site located outside
United States) to a location outside the
United States (for example, a copy of the
export bill of lading issued by the
carrier which delivered the property, or
a copy of the certificate of lading for the
property executed by a customs officer
of the country to which the property is
delivered); or
(D) Any other forms of documentation
as prescribed by the Secretary in forms,
instructions, or other guidance.
(ii) Special rules—(A) Special rule for
small businesses. A seller that receives
less than $10,000,000 in gross receipts
during the prior taxable year establishes
that the sale of general property in a
taxable year to any recipient is for a
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
foreign use for the taxable year if the
seller’s shipping address for the
recipient is outside the United States. If
the seller’s prior taxable year was a
short period, gross receipts are
annualized by multiplying the gross
receipts for the short period by 365 and
dividing the result by the number of
days in the short period.
(B) Special rule for small transactions.
A seller that receives less than $5,000 in
gross receipts during a taxable year from
a recipient establishes that the sale of
general property to the recipient is for
a foreign use for the taxable year if the
seller’s shipping address for the
recipient is outside the United States.
(iii) Sales of fungible mass of general
property. In the case of sales of multiple
items of general property, which
because of their fungible nature cannot
reasonably be specifically traced to the
location of use (fungible mass), as an
alternative to obtaining the
documentation described in paragraphs
(d)(3)(i)(A) through (D) of this section, a
seller may establish that a portion of the
fungible mass is for a foreign use
through market research, including
statistical sampling, economic modeling
and other similar methods indicating
that the property will be subject to a
foreign use. If, under the preceding
sentence, the seller establishes that 90
percent or more of a fungible mass is for
a foreign use, then the entire fungible
mass is for a foreign use. If, under the
first sentence of this paragraph
(d)(3)(iii), the seller does not establish
that 10 percent or more of the sale of a
fungible mass is for a foreign use, then
no portion of the fungible mass is for a
foreign use.
(4) Examples. The following examples
illustrate the application of this
paragraph (d).
(i) Presumed facts. The following facts
are assumed for purposes of the
examples—
(A) DC is a domestic corporation.
(B) FP is a foreign person that is a
foreign unrelated party (as defined in
§ 1.250(b)–6(b)(2)) with respect to DC,
and DC obtains documentation
establishing that FP is a foreign person.
(C) Any documentation obtained
meets the reliability requirements
described in § 1.250(b)–3(d).
(D) The treatment of any sale as a
FDDEI sale would not reduce DC’s
foreign-derived deduction eligible
income for the year.
(ii) Examples.
(A) Example 1: Manufacturing outside the
United States—(1) Facts. DC sells general
property for $18x to FP for manufacture
outside the United States and obtains
documentation of shipment of the property to
a location outside the United States. DC does
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
not know or have reason to know that the
property will be subject to a domestic use
before manufacture, but DC knows or has
reason to know that the property will be
subject to a domestic use after manufacture
and within three years of delivery to FP. FP
will incorporate the property into a second
product outside the United States that FP
will sell to a United States person for $100x.
The property is not physically or materially
changed in the process of its incorporation
into the second product.
(2) Analysis. Because the fair market value
of the general property FP purchases from DC
and incorporates into the second product
does not exceed 20% of the fair market value
of the second product, the general property
FP purchases from DC is a component, and
therefore the property is treated as subject to
manufacture, assembly, or other processing
outside the United States. See paragraphs
(d)(2)(iii)(A) and (B) of this section. As a
result, notwithstanding that DC knows or has
reason to know that the property will be
subject to a domestic use within three years
of delivery, DC does not know or have reason
to know that its sale of general property to
FP is not for a foreign use. See paragraph
(d)(2)(i)(B) of this section. Accordingly, DC’s
sale of property to FP is for a foreign use
under paragraph (d)(2) of this section, and
the sale is a FDDEI sale.
(B) Example 2: Manufacturing outside the
United States—(1) Facts. The facts are the
same as in paragraph (d)(2)(iv)(A)(1) of this
section (the facts in Example 1), except FP
purchases the general property from DC for
$25x.
(2) Analysis. Because the fair market value
of the general property FP purchases from DC
and incorporates into the second product
exceeds 20% of the fair market value of the
second product, the general property is not
treated as a component of the second
product. Because the property is also not
subject to a physical and material change in
the process of incorporation into the second
product, the property is not subject to
manufacture, assembly, or other processing
outside the United States. As a result,
because DC knows or has reason to know that
FP will sell the second product, which
includes the property, for domestic use, DC
knows or has reason to know that its sale of
general property to FP is not for a foreign use.
Accordingly, DC’s sale of the property to FP
is not for a foreign use under paragraph (d)(2)
of this section, and the sale is not a FDDEI
sale.
(C) Example 3: Sale of a fungible mass of
products—(1) Facts. DC and persons other
than DC sell multiple units of fungible
general property to FP during the taxable
year. DC obtains documentation of shipment
of the property to a location outside the
United States, but it knows or has reason to
know that some portion of the property will
be resold back to customers in the United
States. DC also engages in reliable market
research that determines that approximately
25% of the fungible general property FP sold
during the taxable year is for domestic use.
(2) Analysis. Notwithstanding that the
documentation of shipment meets the
reliability requirements of § 1.250(b)–3(d),
DC knows or has reason to know that certain
PO 00000
Frm 00037
Fmt 4701
Sfmt 4702
8223
units of the property are not for a foreign use.
See paragraphs (d)(1) and (2) of this section.
However, DC can establish foreign use of a
portion of the fungible property through its
market research. See paragraphs (d)(1) and
(d)(3)(iii) of this section. Based on its market
research, DC knows that approximately 25%
of the total units of fungible general property
that FP purchased from all persons in the
taxable year is sold by FP for domestic use.
Accordingly, DC satisfies the test for a foreign
use under paragraph (d)(2) of this section
with respect to 75% of its sales of the
property to FP.
(e) Foreign use for intangible
property—(1) In general. A sale of
intangible property is for a foreign use
only to the extent the seller establishes
that the sale is for a foreign use within
the meaning of paragraph (e)(2) of this
section by obtaining documentation
described in paragraph (e)(3) of this
section (which meets the reliability
requirements described in § 1.250(b)3(d)) and, as of the FDII filing date, the
seller does not know or have reason to
know that the portion of the sale of the
intangible property for which the seller
establishes foreign use is not for a
foreign use within the meaning of
paragraph (e)(2) of this section.
(2) Determination of foreign use—(i)
In general. A sale of intangible property
is for a foreign use only to the extent
that the intangible property generates
revenue from exploitation outside the
United States. A sale of intangible
property rights providing for
exploitation both within the United
States and outside the United States is
for a foreign use in proportion to the
revenue generated from exploitation of
the intangible property outside the
United States over the total revenue
generated from the exploitation of the
intangible property. For intangible
property used in the development,
manufacture, sale, or distribution of a
product, the intangible property is
treated as exploited at the location of
the end user when the product is sold
to the end user. Paragraphs (e)(2)(ii) and
(iii) of this section provide rules for how
and when to determine revenue from
exploitation with respect to different
types of sales of intangible property.
(ii) Sales in exchange for periodic
payments. In the case of a sale of
intangible property to a foreign person
in exchange for periodic payments, the
extent to which the sale is for a foreign
use is determined on an annual basis
based on the actual revenue earned by
the recipient for the taxable year in
which a periodic payment is received.
(iii) Sales in exchange for a lump
sum. In the case of a sale of intangible
property to a foreign person for a lump
sum, the extent to which the sale is for
a foreign use is determined based on the
E:\FR\FM\06MRP2.SGM
06MRP2
8224
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
ratio of the total net present value of
revenue the seller would have
reasonably expected to earn from the
exploitation of the intangible property
outside the United States to the total net
present value of revenue the seller
would have reasonably expected to earn
from the exploitation of the intangible
property.
(3) Documentation of foreign use of
intangible property—(i) Documentation
for sales for periodic payments. Except
as provided in paragraph (e)(3)(ii) of this
section, a seller establishes the extent to
which a sale of intangible property
described in paragraph (e)(2)(ii) of this
section is for a foreign use by obtaining
one or more of the following types of
documentation with respect to the
sale—
(A) A written statement from the
recipient providing the amount of the
annual revenue from sales or
sublicenses of the intangible property or
sales of products with respect to which
the intangible property is used that is
generated as a result of exploitation of
the intangible property outside the
United States and the total amount of
revenue from such sales or sublicenses
worldwide;
(B) A binding contract for the sale of
the intangible property that provides
that the intangible property can be
exploited solely outside the United
States;
(C) Audited financial statements or
annual reports of the recipient stating
the amount of annual revenue earned
within the United States and outside the
United States from sales of products
with respect to which the intangible
property is used;
(D) Any statements or documents
used by the seller and the recipient to
determine the amount of payment due
for exploitation of the intangible
property if those statements or
documents provide reliable data on
revenue earned within the United States
and outside the United States; or
(E) Any other forms of documentation
as prescribed by the Secretary in forms,
instructions, or other guidance.
(ii) Certain sales to foreign unrelated
parties. In the case of a sale of intangible
property described in paragraph
(e)(2)(ii) of this section that are not
contingent on revenue or profit to a
foreign unrelated party (as defined in
§ 1.250(b)–6(b)(2)), where the seller is
unable to obtain the documentation
described in paragraph (e)(3)(i) of this
section without undue burden, a seller
establishes the extent to which the sale
of intangible property is for a foreign
use using the principles of paragraph
(e)(3)(iii) of this section, except that the
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
seller must make reasonable projections
on an annual basis.
(iii) Documentation for sales in
exchange for a lump sum. A seller
establishes the extent to which a sale of
intangible property described in
paragraph (e)(2)(iii) of this section is for
a foreign use through documentation
containing reasonable projections of the
amount and location of revenue that the
seller would have reasonably expected
to earn from exploiting the intangible
property. To be considered reasonable,
the projections must be consistent with
the financial data and projections used
by the seller to determine the price it
sold the intangible property to the
foreign person.
(4) Examples. The following examples
illustrate the application of this
paragraph (e).
(i) Presumed facts. The following facts
are assumed for purposes of the
examples—
(A) DC is a domestic corporation.
(B) Except as otherwise provided, FP
and FP2 are foreign persons that are
foreign unrelated parties (as defined in
§ 1.250(b)–6(b)(2)) with respect to DC.
(C) Any documentation obtained
meets the reliability requirements
described in § 1.250(b)–3(d).
(D) All of DC’s income is deduction
eligible income.
(E) The treatment of any sale as a
FDDEI sale would not reduce DC’s
foreign-derived deduction eligible
income for the year.
(ii) Examples.
(A) Example 1: License of worldwide rights
with documentation—(1) Facts. DC licenses
to FP worldwide rights to the copyright to
composition A in exchange for annual
royalties of $60x. FP sells composition A to
customers through digital downloads from
servers. In the taxable year, FP earns $100x
in revenue from sales of copies of
composition A to customers, of which $60x
is from customers located in the United
States and the remaining $40x is from
customers located outside the United States.
FP provides DC with records showing the
amount of revenue earned in the taxable year
from sales of composition A to establish the
royalties owed to DC. These records also
provide DC with the amount of revenue
earned from sales of composition A in
different countries, including the United
States.
(2) Analysis. Based on the information
provided, DC has obtained documentation
establishing that 40% ($40x/$100x) of the
revenue generated by the copyright during
the taxable year is earned outside the United
States. Accordingly, a portion of DC’s license
to FP is for a foreign use under paragraph
(e)(2) of this section and therefore such
portion is a FDDEI sale. The $24x of royalty
(0.40 × $60x) derived with respect to such
portion is included in DC’s gross FDDEI for
the taxable year.
PO 00000
Frm 00038
Fmt 4701
Sfmt 4702
(B) Example 2: License of worldwide rights
without documentation—(1) Facts. The facts
are the same as in paragraph (e)(4)(ii)(A)(1)
of this section (the facts in Example 1),
except FP does not provide DC with data
showing how much revenue was earned from
sales in different countries.
(2) Analysis. DC has not obtained
documentation establishing the amount of
revenue FP earned from sales of composition
A outside the United States. Accordingly,
DC’s license of the copyright is not for a
foreign use under paragraph (e)(2) of this
section and is not a FDDEI sale.
(C) Example 3: Sale of patent rights
protected in the United States and other
countries; documentation through financial
projections—(1) Facts. DC owns a patent for
an active pharmaceutical ingredient (‘‘API’’)
approved for treatment of disease A
(‘‘indication A’’) in the United States and in
Countries A, B, and C. The patent is
registered in the United States and in
Countries A, B, and C. DC sells to FP all of
its patent rights to the API for indication A
for a lump sum payment of $1,000x. DC has
no basis in the patent rights. To determine
the sales price for the patent rights, DC
projected that the net present value of the
revenue it would earn from selling a
pharmaceutical product incorporating the
API for indication A was $5,000x, with 15%
of the revenue earned from sales within the
United States and 85% of the revenue earned
from sales outside the United States.
(2) Analysis. Based on the financial
projections DC used to determine the sales
price, DC has obtained documentation
establishing that 85% of the revenue that will
be generated by the patent rights will be
outside the United States. Accordingly, a
portion of DC’s sale to FP is for a foreign use
under paragraph (e)(2) of this section and
such portion is a FDDEI sale. The $850x
(85% × $1,000x) of gain derived with respect
to such portion is included in DC’s gross
FDDEI for the taxable year.
(D) Example 4: Limited use license of
copyrighted computer software;
documentation through public filing—(1)
Facts. DC provides FP with a limited use
license to copyrighted computer software in
exchange for an annual fee of $100x. The
limited use license restricts FP’s use of the
computer software to 100 of FP’s employees.
The limited use license prohibits FP from
using the computer software in any way
other than as an end-user, which includes
prohibiting sublicensing, selling, reverse
engineering, or modifying the computer
software. FP’s annual report for the taxable
year indicates that all of FP’s employees are
physically located outside the United States.
(2) Analysis. The software licensed to FP
is exploited where its employees that use the
software are located. The revenue DC earns
from the limited use license to FP is based
on the number of FP’s employees allowed to
use the computer software as end-users.
Based on FP’s annual report for the taxable
year, DC has obtained documentation
establishing that all the revenue generated for
the use of the copyrighted computer software
is earned outside the United States for the
taxable year. Accordingly, DC’s license to FP
is for a foreign use and therefore a FDDEI
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
sale. The entire $100x of the license fee is
included in DC’s gross FDDEI for the taxable
year.
(E) Example 5: Limited use license of
copyrighted computer software;
documentation through public filing—(1)
Facts. The facts are the same as in paragraph
(e)(4)(ii)(D)(1) of this section (the facts in
Example 4), except that FP’s annual report
for the taxable year indicates that FP has
offices both within and outside the United
States, and that 50% of FP’s revenue is
earned within the United States.
(2) Analysis. Based on FP’s annual report
for the taxable year, DC has obtained
documentation establishing that 50% of the
revenue generated from the use of the
copyrighted computer software is outside the
United States for the taxable year.
Accordingly, a portion of DC’s license to FP
is for a foreign use and therefore such portion
is a FDDEI sale. The $50x of license fee
derived with respect to such portion is
included in DC’s gross FDDEI for the taxable
year.
(F) Example 6: Deemed sale in exchange
for contingent payments under section
367(d)—(1) Facts. DC owns 100% of the
stock of FP, a foreign related party (as
defined in § 1.250(b)–6(b)(1)) with respect to
DC. FP manufactures and sells product A.
For the taxable year, DC contributes to FP
exclusive worldwide rights to patents,
trademarks, knowhow, customer lists, and
goodwill and going concern value
(collectively, intangible property) related to
product A in an exchange described in
section 351. As a result, DC is required to
report an annual income inclusion on its
Federal income tax return based on the
productivity, use, or disposition of the
contributed intangible property under section
367(d). DC includes a percentage of FP’s
revenue in its gross income under section
367(d) each year. In the current taxable year,
FP earns $1,000x of revenue from sales of
product A. Based on FP’s sales records for
the taxable year, $300x of its revenue is
earned from sales of product A to customers
within the United States, and $700x of its
revenue is earned from sales of product A to
customers outside the United States.
(2) Analysis. DC’s deemed sale of the
intangible property to FP in exchange for
payments contingent upon the productivity,
use, or disposition of the intangible property
related to product A under section 367(d) is
a sale for purposes of section 250 and this
section. See § 1.250(b)–3(b)(7). Based on FP’s
sales records, DC has obtained
documentation that 70% ($700/$1,000x) of
the revenue generated by the intangible
property is generated outside the United
States in the taxable year. Accordingly, for
the taxable year, 70% of DC’s deemed sale to
FP is for a foreign use, and 70% of DC’s
income inclusion under section 367(d)
derived with respect to such portion is
included in DC’s gross FDDEI for the taxable
year.
(f) Special rule for certain financial
instruments. The sale of a security (as
defined in section 475(c)(2)) or a
commodity (as defined in section
475(e)(2)(B) through (D)) is not a FDDEI
sale.
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
§ 1.250(b)–5
FDDEI services.
(a) Scope. This section provides rules
for determining whether a provision of
a service is a FDDEI service. Paragraph
(b) of this section defines a FDDEI
service. Paragraph (c) of this section
provides definitions relevant for
determining whether a provision of a
service is a FDDEI service. Paragraph (d)
of this section provides rules for
determining whether a general service is
provided to a consumer located outside
the United States. Paragraph (e) of this
section provides rules for determining
whether a general service is provided to
a business recipient located outside the
United States. Paragraph (f) of this
section provides rules for determining
whether a proximate service is provided
to a recipient located outside the United
States. Paragraph (g) of this section
provides rules for determining whether
a service is provided with respect to
property located outside the United
States. Paragraph (h) of this section
provides rules for determining whether
a transportation service is provided to a
recipient, or with respect to property,
located outside the United States.
(b) Definition of FDDEI service. Except
as provided in § 1.250(b)–6(d), the term
FDDEI service means a provision of a
service described in one of paragraphs
(b)(1) through (5) of this section. If only
a portion of a service is treated as
provided to a person, or with respect to
property, outside the United States, the
provision of the service is a FDDEI
service only to the extent of the gross
income derived with respect to such
portion.
(1) The provision of a general service
to a consumer located outside the
United States (as determined under
paragraph (d) of this section).
(2) The provision of a general service
to a business recipient located outside
the United States (as determined under
paragraph (e) of this section).
(3) The provision of a proximate
service to a recipient located outside the
United States (as determined under
paragraph (f) of this section).
(4) The provision of a property service
with respect to tangible property located
outside the United States (as determined
under paragraph (g) of this section).
(5) The provision of a transportation
service to a recipient, or with respect to
property, located outside the United
States (as determined under paragraph
(h) of this section).
(c) Definitions. This paragraph (c)
provides definitions that apply for
purposes of this section and
§ 1.250(b)–6.
(1) Benefit. The term benefit has the
meaning set forth in § 1.482–9(l)(3).
PO 00000
Frm 00039
Fmt 4701
Sfmt 4702
8225
(2) Business recipient. The term
business recipient means a recipient
other than a consumer.
(3) Consumer. The term consumer
means a recipient that is an individual
that purchases a general service for
personal use.
(4) General service. The term general
service means any service other than a
property service, proximate service, or
transportation service.
(5) Property service. The term
property service means a service, other
than a transportation service, provided
with respect to tangible property, but
only if substantially all of the service is
performed at the location of the
property and results in physical
manipulation of the property such as
through assembly, maintenance, or
repair. Substantially all of a service is
performed at the location of property if
the renderer spends more than 80
percent of the time providing the service
at or near the location of the property.
(6) Proximate service. The term
proximate service means a service, other
than a property service or a
transportation service, provided to a
recipient, but only if substantially all of
the service is performed in the physical
presence of the recipient or, in the case
of a business recipient, its employees.
Substantially all of a service is
performed in the physical presence of
the recipient or its employees if the
renderer spends more than 80 percent of
the time providing the service in the
physical presence of the recipient or its
employees.
(7) Transportation service. The term
transportation service means a service
to transport a person or property using
aircraft, railroad rolling stock, vessel,
motor vehicle, or any similar mode of
transportation.
(d) General services provided to
consumers—(1) In general. A general
service is provided to a consumer
located outside the United States only if
the renderer establishes that the
consumer is located outside the United
States by obtaining the documentation
described in paragraph (d)(3) of this
section (which meets the reliability
requirements described in § 1.250(b)–
3(d)) and, as of the FDII filing date, the
renderer does not know or have reason
to know that the consumer is located
within the United States (as determined
under paragraph (d)(2) of this section)
when the service is provided.
(2) Location of consumer. For
purposes of paragraph (d)(1) of this
section, the consumer of a general
service is located where the consumer
resides when the service is provided.
(3) Documentation of location of
consumer—(i) In general. Except as
E:\FR\FM\06MRP2.SGM
06MRP2
8226
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
provided in paragraph (d)(3)(ii) of this
section, a renderer establishes that a
consumer is located outside the United
States only if the renderer obtains one
or more of the following types of
documentation with respect to the
consumer—
(A) A written statement by the
consumer indicating that the consumer
resides outside the United States when
the service is provided;
(B) Any valid identification issued by
a foreign government or an agency
thereof that is typically used for
identification purposes; or
(C) Any other forms of documentation
as prescribed by the Secretary in forms,
instructions, or other guidance.
(ii) Special rules—(A) Special rule for
small businesses. A renderer that
receives less than $10,000,000 in gross
receipts during the prior taxable year
establishes that any consumer of a
service provided in the taxable year is
located outside the United States if the
renderer’s billing address for the
consumer is outside of the United
States. If a renderer has a prior taxable
year of fewer than 12 months (a short
period), gross receipts are annualized by
multiplying the gross receipts for the
short period by 365 and dividing the
result by the number of days in the short
period.
(B) Special rule for small transactions.
A renderer that receives less than $5,000
in gross receipts during a taxable year
from a consumer establishes that such
consumer is located outside the United
States for such taxable year if the
renderer’s billing address for the
consumer is outside the United States.
(e) General services provided to
business recipients—(1) In general. A
general service is provided to a business
recipient located outside the United
States only to the extent that the
renderer establishes that the service is
provided to a business recipient located
outside the United States (as determined
under paragraph (e)(2) of this section)
by obtaining the documentation
described in paragraph (e)(3) of this
section (which meets the reliability
requirements described in § 1.250(b)–
3(d)) and, as of the FDII filing date, the
renderer does not know or have reason
to know that the portion of the service
which the seller establishes is provided
to a business recipient located outside
the United States is provided to a
business recipient that is located within
the United States when the service is
provided.
(2) Location of business recipient—(i)
In general. A service is provided to a
business recipient located outside of the
United States to the extent that the gross
income derived by the renderer from
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
such service is allocated to the business
recipient’s operations outside the
United States under the rules in
paragraphs (e)(2)(i)(A) and (B) of this
section. A service is provided to a
business recipient located within the
United States to the extent that a service
is not provided to a business recipient
located outside the United States.
(A) Determination of business
operations that benefit from the service.
If the renderer provides a service that
provides a benefit to the operations of
the business recipient in specific
locations, gross income of the renderer
is allocated to a business recipient’s
operations outside the United States to
the extent that the benefit of the service
is conferred on operations of the
business recipient that are located
outside the United States. However, if
the renderer is unable to obtain reliable
information regarding the specific
locations of the operations of the
business recipient to which a benefit is
conferred, or if the renderer provides a
service that does not provide a benefit
to specific locations of the business
recipient’s operations but rather will
generally confer a benefit on all
locations of the business recipient’s
operations, gross income of the renderer
is allocated ratably to all of the business
recipient’s operations at the time the
service is provided.
(B) Determination of amount of
benefit conferred on operations outside
the United States. The amount of the
benefit conferred on a business
recipient’s operations located outside
the United States is determined under
any method that is reasonable under the
circumstances. In determining whether
a method is reasonable, the principles of
§ 1.482–9(k) apply, treating the business
recipient’s operations in different
locations as if they were ‘‘recipients’’
and treating the renderer’s gross income
as if they were ‘‘costs’’ as those terms
are used in § 1.482–9(k). Reasonable
methods may include, for example,
allocations based on time spent or costs
incurred by the renderer or gross
receipts, revenue, profits, or assets of
the business recipient.
(ii) Location of business recipient’s
operations. For purposes of this
paragraph (e), a business recipient is
treated as having operations in any
location where it maintains an office or
other fixed place of business.
(3) Documentation of location of
business recipient—(i) In general. A
renderer establishes that a business
recipient is located outside the United
States only if the renderer obtains one
or more of the types of documentation
described in paragraphs (e)(3)(i)(A)
through (E) of this section. The
PO 00000
Frm 00040
Fmt 4701
Sfmt 4702
documentation must also support the
renderer’s allocation of income
described in paragraph (e)(2)(i) of this
section.
(A) A written statement from the
business recipient that specifies the
locations of the operations of the
business recipient that benefit from the
service.
(B) A binding contract that specifies
the locations of the operations of the
business recipient that benefit from the
service.
(C) Documentation obtained in the
ordinary course of the provision of the
service that specifies the locations of the
operations of the business recipient that
benefit from the service.
(D) Publicly available information that
establishes the locations of the
operations of the business recipient.
(E) Any other forms of documentation
as prescribed by the Secretary in forms,
instructions, or other guidance.
(ii) Special rules—(A) Special rule for
small businesses. A renderer that
receives less than $10,000,000 in gross
receipts during a prior taxable year
establishes that a business recipient of
a service provided in a taxable year is
located outside the United States if the
renderer’s billing address for the
business recipient is outside of the
United States. If the renderer’s prior
taxable year is less than 12 months (a
short period), gross receipts are
annualized by multiplying the gross
receipts for the short period by 365 and
dividing the result by the number of
days in the short period.
(B) Special rule for small transactions.
A renderer that receives less than $5,000
in gross receipts during a taxable year
from services provided to a business
recipient in such taxable year
establishes that such business recipient
is located outside the United States if
the renderer’s billing address for the
business recipient is outside the United
States.
(4) Related parties. For purposes of
this paragraph (e), a reference to a
business recipient includes a reference
to any related party of the business
recipient.
(5) Examples. The following examples
illustrate the application of this
paragraph (e).
(i) Presumed facts. The following facts
are assumed for purposes of the
examples—
(A) DC is a domestic corporation.
(B) A and R are not related parties of
DC.
(C) Any documentation obtained
meets the reliability requirements
described in § 1.250(b)–3(d).
(D) The treatment of any service as a
FDDEI service would not reduce DC’s
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
foreign-derived deduction eligible
income for the year.
(ii) Examples.
(A) Example 1: Service that benefits
specific aspects of the business recipient’s
business—(1) Facts. For the taxable year, DC
provides a marketing service to R, a company
that operates restaurants within and outside
of the United States, in exchange for $150×.
Publicly available information indicates that
50% of the revenue earned by R and its
related parties is from customers located
outside of the United States. However, the
marketing service that DC provides relates
specifically to a single chain of restaurants
that R operates. Sales information that R
provides to DC indicates that 70% of the
revenue of the restaurant chain is from
locations within the United States and 30%
of the revenue is from locations outside the
United States.
(2) Analysis. R is located outside the
United States in part under paragraph
(e)(2)(i) of this section because DC’s services
benefit both R’s operations within the United
States and its operations outside the United
States. Under paragraph (e)(2)(i) of this
section, the portion of the service provided
by DC that is treated as provided to a person
located outside the United States is
determined by the amount of DC’s gross
income from the service that is allocated to
R’s operations outside the United States.
Because DC provides a service that provides
a benefit to R’s operations in specific
locations, and reliable information about the
specific locations of the operations that
receive a benefit is available, DC must
determine R’s location based on information
relating specifically to R’s business
operations that benefits from DC’s service.
See paragraph (e)(2)(i)(A) of this section. In
this case, allocation of DC’s gross income
based on the revenue of the business
recipient is a reasonable method. See
paragraph (e)(2)(i)(B) of this section.
Therefore, 30% of the provision of the
marketing service is treated as the provision
of a service to a person located outside the
United States and a FDDEI service under
paragraph (b)(2) of this section. Accordingly,
$45× ($150× × 0.30) of DC’s gross income
from the provision of the marketing service
is included in DC’s gross FDDEI for the
taxable year.
(B) Example 2: Service that benefits the
business recipient’s operations generally—(1)
Facts. The facts are the same as in paragraph
(e)(5)(ii)(A)(1) of this section (the facts in
Example 1), except that DC provides an
information technology service to R that
benefits R’s entire business.
(2) Analysis. Because the service that DC
provides relate to R’s entire business, DC may
rely on publicly available information
indicating that 50% of R’s operations are
outside of the United States. See paragraph
(e)(2)(i)(A) of this section. Therefore, 50% of
the provision of the information technology
service is treated as a service to a person
located outside the United States and a
FDDEI service under paragraph (b)(2) of this
section. Accordingly, $75x ($150x × 0.50) of
DC’s gross income from the provision of the
information technology service is included in
DC’s gross FDDEI for the taxable year.
VerDate Sep<11>2014
20:58 Mar 05, 2019
Jkt 247001
(C) Example 3: No reliable information
about which operations benefit from the
service—(1) Facts. The facts are the same as
in paragraph (e)(5)(ii)(A)(1) of this section
(the facts in Example 1), except that no
information is available to DC about the
specific chain of restaurants for which the
service is provided.
(2) Analysis. Because the only information
available to DC relates to R’s entire business,
DC may rely on publicly available
information indicating that 50% of R’s
operations are outside of the United States to
determine the portion of the service treated
as provided to a person located outside the
United States. See paragraph (e)(2)(i)(A) of
this section. Therefore, 50% of the provision
of the marketing service is treated as a service
to a person located outside the United States
and a FDDEI service under paragraph (b)(2)
of this section. Accordingly, $75x ($150x ×
0.50) of DC’s gross income from the provision
of the marketing service is included in DC’s
gross FDDEI for the taxable year.
(D) Example 4: Service provided to a
domestic intermediary—(1) Facts. A, a
domestic corporation that operates solely in
the United States, enters into a services
agreement with R, a company that operates
solely outside the United States. Under the
agreement, A agrees to perform a consulting
service for R. A hires DC to provide a service
to A that A will use in the provision of a
consulting service to R.
(2) Analysis. A is located within the United
States because the service that DC provides
A confers a benefit solely to A’s operations
within the United States. R is located outside
the United States because the service that A
provides to R confers a benefit solely to R’s
operations outside the United States. See
paragraph (e)(2)(i) of this section. Because DC
provides a service to A, a person located
within the United States, DC’s provision of
the service to A is not a FDDEI service under
paragraph (b)(2) of this section, even though
the service is used by A in providing a
service to R, a person located outside the
United States. See also section
250(b)(5)(B)(ii). However, A’s provision of
the consulting service to R may be a FDDEI
service, in which case A’s gross income from
the provision of such service would be
included in A’s gross FDDEI.
(f) Proximate services. A proximate
service is provided with respect to a
recipient located outside the United
States if the proximate service is
performed outside the United States. In
the case of a proximate service
performed partly within the United
States and partly outside of the United
States, a proportionate amount of the
service is treated as provided to a
recipient located outside the United
States corresponding to the portion of
time the renderer spends providing the
service outside of the United States.
(g) Property services. A property
service is provided with respect to
tangible property located outside the
United States only if the property is
located outside the United States for the
PO 00000
Frm 00041
Fmt 4701
Sfmt 4702
8227
duration of the period the service is
performed.
(h) Transportation services. Except as
provided in this paragraph (h), a
transportation service is provided to a
recipient, or with respect to property,
located outside the United States only if
both the origin and the destination of
the service are outside of the United
States. However, in the case of a
transportation service provided to a
recipient, or with respect to property,
where either the origin or the
destination of the service is outside of
the United States, but not both, then 50
percent of the transportation service is
considered provided to a recipient, or
with respect to property, located outside
the United States.
§ 1.250(b)–6
Related party transactions.
(a) Scope. This section provides
additional rules for determining
whether a sale of property or a provision
of a service to a related party is a FDDEI
transaction. Paragraph (b) of this section
provides additional definitions relevant
for determining whether a sale of
property or a provision of a service to
a related party is a FDDEI transaction.
Paragraph (c) of this section provides
additional rules for determining
whether a sale of general property to a
foreign related party is a FDDEI sale.
Paragraph (d) of this section provides
additional rules for determining
whether the provision of a general
service to a business recipient that is a
related party is a FDDEI service.
(b) Definitions. This paragraph (b)
provides definitions that apply for
purposes of this section.
(1) Foreign related party. The term
foreign related party means, with
respect to a seller or renderer, any
foreign person that is a related party of
the seller or renderer.
(2) Foreign unrelated party. The term
foreign unrelated party means, with
respect to a seller, a foreign person that
is not a related party of the seller.
(3) Related party sale. The term
related party sale means a sale of
general property to a foreign related
party that satisfies the requirements
described in § 1.250(b)–4(b) without
regard to paragraph (c) of this section.
See § 1.250(b)–1(e)(3)(ii)(D) (Example 4)
for an illustration of a related party sale
in the case of a seller that is a
partnership.
(4) Related party service. The term
related party service means a provision
of a general service to a business
recipient that is a related party of the
renderer and that is described in
§ 1.250(b)–5(b)(2) without regard to
paragraph (d) of this section.
E:\FR\FM\06MRP2.SGM
06MRP2
8228
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
(5) Unrelated party transaction. The
term unrelated party transaction means,
with respect to property purchased in a
related party sale from a seller—
(i) A sale of the property by a foreign
related party to a foreign unrelated party
with respect to the seller;
(ii) A sale of property by a foreign
related party to a foreign unrelated party
with respect to the seller if the property
sold in the related party sale is a
component of the property sold to the
foreign unrelated party;
(iii) A sale of property by a foreign
related party to a foreign unrelated party
with respect to the seller, other than a
sale described in paragraph (b)(5)(ii) of
this section, if the property sold in the
related party sale is used in connection
with the property sold to the foreign
unrelated party; or
(iv) A provision of a service by a
foreign related party to a foreign
unrelated party with respect to the
seller, if the property sold in the related
party sale was used in connection with
the provision of the service.
(c) Related party sales—(1) In general.
A related party sale is a FDDEI sale only
if the requirements described in either
paragraph (c)(1)(i) or (ii) of this section
are satisfied with respect to the related
party sale. Section 250(b)(5)(C)(i) and
this paragraph (c) does not apply to
determine whether a sale of intangible
property to a foreign related party is a
FDDEI sale.
(i) Sale of property in an unrelated
party transaction. A related party sale is
a FDDEI sale if an unrelated party
transaction described in paragraph
(b)(5)(i) or (ii) of this section occurs with
respect to the property purchased in the
related party sale, such unrelated party
transaction is described in § 1.250(b)–
4(b), and, except as provided in this
paragraph (c)(1)(i), the unrelated party
transaction occurs on or before the FDII
filing date. In the case of an unrelated
party transaction that occurs after the
FDII filing date with respect to a related
party sale, a taxpayer may file an
amended return for the taxable year in
which the related party sale occurred,
within the period of limitations
provided by section 6511, claiming the
related party sale as a FDDEI sale for
purposes of determining the taxpayer’s
foreign-derived intangible income for
that taxable year.
(ii) Use of property in an unrelated
party transaction. A related party sale is
a FDDEI sale if, as of the FDII filing date,
the seller in the related party sale
reasonably expects that one or more
unrelated party transactions described
in paragraph (b)(5)(iii) or (iv) of this
section will occur with respect to the
property purchased in the related party
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
sale, such unrelated party transaction or
transactions would be described in
§ 1.250(b)–4(b) or § 1.250(b)–5(b)
without regard to the documentation
rules in § 1.250(b)–4 or § 1.250(b)–5, and
more than 80 percent of the revenue
earned by the foreign related party with
respect to the property will be earned
from such unrelated party transaction or
transactions.
(2) Treatment of foreign related party
as seller or renderer. For purposes of
determining whether a sale of property
or provision of a service by a foreign
related party is, or would be, described
in § 1.250(b)–4 or § 1.250(b)–5 (except
for purposes of obtaining
documentation), the foreign related
party that sells the property or provides
the service is treated as a seller or
renderer, as applicable, and the foreign
unrelated party is treated as the
recipient. In the case of an unrelated
party transaction described in paragraph
(b)(5)(i) or (ii) of this section, the seller
in the related party sale must obtain the
documentation required in § 1.250(b)–4.
(3) Transactions between a foreign
related party and other foreign related
parties. All foreign related parties of the
seller are treated as if they were a single
foreign related party for purposes of
applying paragraphs (c)(1) and (2) of
this section. Accordingly, if a foreign
related party sells or uses property
purchased in a related party sale in a
transaction with a second foreign
related party of the seller, transactions
between the second foreign related party
and unrelated parties may be treated as
an unrelated party transaction for
purposes of applying paragraph (c)(1) of
this section to a related party sale.
(4) Example. The following example
illustrates the application of paragraph (c) of
this section.
(i) Facts. DC, a domestic corporation, sells
a machine to FC, a foreign related party of
DC in a transaction described in § 1.250(b)–
4(b) (without regard to § 1.250(b)–6(c)). FC
uses the machine solely to manufacture
product A. As of the FDII filing date for the
taxable year, FC reasonably expects that more
than 80% of future revenue from sales of
product A will be from sales that would be
described in § 1.250(b)–4(b) without regard to
the documentation requirements of
§ 1.250(b)–4(c) and (d).
(ii) Analysis. The sale by DC to FC is a
related party sale. Because FC uses the
machine to make product A, but the machine
is not a component of product A, FC’s sale
of product A is an unrelated party transaction
described in paragraph (b)(5)(iii) of this
section. Therefore, DC’s sale of the machine
is only a FDDEI sale if the requirements of
paragraph (c)(1)(ii) of this section are
satisfied. Because DC reasonably expects that
more than 80% of the revenue from future
sales of product A will be from unrelated
party transactions that would be described in
PO 00000
Frm 00042
Fmt 4701
Sfmt 4702
§ 1.250(b)–4(b), DC’s sale of the machine to
FC is a FDDEI sale.
(d) Related party services—(1) In
general. Except as provided in this
paragraph (d)(1), a related party service
is a FDDEI service only if the related
party service is not substantially similar
to a service provided by the related
party to a person located within the
United States. However, if a related
party service is substantially similar to
a service provided (in whole or in part)
by the related party to a person located
in the United States solely by reason of
paragraph (d)(2)(ii) of this section, the
amount of gross income from the related
party service attributable to a FDDEI
service is equal to the gross income from
the related party service multiplied by
a fraction, the numerator of which is the
sum of the benefits conferred by the
related party service to persons not
located within the United States and the
denominator of which is the sum of all
benefits conferred by the related party
service. Section 250(b)(5)(C)(ii) and this
paragraph (d)(1) apply only to a general
service provided to a business recipient
and are not applicable with respect to
any other service provided to a foreign
related party.
(2) Substantially similar services. A
related party service is substantially
similar to a service provided by the
related party to a person located within
the United States only if the related
party service is used by the related party
to provide a service to a person located
within the United States and either—
(i) 60 percent or more of the benefits
conferred by the related party service
are to persons located within the United
States; or
(ii) 60 percent or more of the price
paid by persons located within the
United States for the service provided
by the related party is attributable to the
related party service.
(3) Location of recipient of services
provided by related party. For purposes
of paragraph (d) of this section, the
location of a consumer or business
recipient with respect to a related party
service is determined under the
principles of § 1.250(b)–5(d)(2) and
(e)(2), respectively.
(4) Examples. The following examples
illustrate the application of this
paragraph (d).
(i) Presumed facts. The following facts
are assumed for purposes of the
examples—
(A) DC is a domestic corporation.
(B) FC is a foreign corporation and a
foreign related party of DC that operates
solely outside the United States.
(C) The service DC provides to FC is
a general service provided to a business
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
recipient located outside the United
States as described in § 1.250(b)–5(b)(2)
without regard to the application of
paragraph (d) of this section.
(D) The benefits conferred by DC’s
service to FC’s customers are not
indirect or remote within the meaning
of § 1.482–9(l)(3)(ii).
(ii) Examples.
(A) Example 1: Services that are
substantially similar services under
paragraph (d)(2)(i) of this section—(1) Facts.
FC enters into a services agreement with R,
a company that operates restaurant chains
within and outside the United States. Under
the agreement, FC agrees to furnish a design
for the renovation of a chain of restaurants
that R owns, which design will include
architectural plans. FC hires DC to provide
an architectural service to FC that FC will use
in the provision of its design service to R.
The architectural service that DC provides to
FC will serve no other purpose than to enable
FC to provide its service to R. The
architectural service will benefit solely R’s
operations within the United States. FC pays
an arm’s length price of $50x to DC for the
architectural service and DC recognizes $50x
of gross income from the service. FC incurs
additional costs to add additional design
elements to the plans and charges R a total
of $100x for its service.
(2) Analysis. The service that DC provides
to FC is used in the provision of a service to
R. R is treated as entirely located within the
United States under paragraph (d)(3) of this
section and the principles of § 1.250(b)–
5(e)(2) because only its U.S. operations
benefit from the service provided by DC.
Because FC uses DC’s architectural service to
provide its design service to R, and the
architectural service that DC provides to FC
will serve no purpose other than to enable FC
to provide its service to R, 100% of the
benefits conferred by DC’s architectural
service are to R, a person located within the
United States. Therefore, the service
provided by DC to FC is substantially similar
to the service provided by FC to R under
paragraph (d)(2)(i) of this section.
Accordingly, DC’s provision of the
architectural service to FC is not a FDDEI
service under paragraph (d)(1) of this section
and DC’s gross income from the architectural
service ($50x) is not included in its gross
FDDEI.
(B) Example 2: Services that are
substantially similar services under
paragraph (d)(2)(ii) of this section—(1) Facts.
The facts are the same as paragraph
(d)(4)(ii)(A)(1) (the facts in Example 1),
except that FC pays an arm’s length price of
$75× to DC for the architectural service, DC
recognizes $75× of gross income from the
service, and 90% of the benefits of DC’s
architectural service are conferred on R’s
operations outside the United States.
(2) Analysis—(i) Analysis under paragraph
(d)(2)(i) of this section. R is treated as located
within the United States with respect to DC’s
architectural service under paragraph (d)(3)
of this section to the extent of the benefits
conferred on its operations within the United
States by the architectural service. See
§ 1.250(b)–5(e)(2). Because 90% of the
VerDate Sep<11>2014
20:58 Mar 05, 2019
Jkt 247001
8229
benefits of DC’s architectural service are
conferred on R’s operations outside the
United States, only 10% of the benefits of
DC’s architectural service are treated as
conferred on persons located within the
United States under paragraph (d)(3) of this
section. Therefore, the architectural service
provided by DC to FC is not substantially
similar to the design service provided by FC
to persons located within the United States
under paragraph (d)(2)(i) of this section.
(ii) Analysis under paragraph (d)(2)(ii) of
this section. Because 10% of the benefits of
FC’s architectural design services are
conferred on R’s operations within the
United States, $10x of the amount paid by R
for FC’s services (10% x $100) is treated as
paid by persons located within the United
States. Similarly, because 10% of the benefits
of DC’s architectural services are conferred
on R’s operations within the United States,
of the $10x paid with respect to R’s
operations within the United States, $7.5x
(10% x $75x) is attributable to DC’s
architectural service. Accordingly, because
75% ($7.5 × /$10x) of the price paid by R to
FC for the design service is attributable to the
architectural service provided by DC to FC,
and R is a person located within the United
States under paragraph (d)(3) of this section
and the principles of § 1.250(b)–5(e)(2), the
architectural service provided by DC to FC is
substantially similar to the design service
provided by FC to persons located within the
United States under paragraph (d)(2)(ii) of
this section.
(iii) Application of paragraph (d)(1) of this
section. Because DC’s architectural service is
substantially similar to FC’s design service
provided to R, a person located in the United
States, solely by reason of paragraph (d)(2)(ii)
of this section, the amount of gross income
from DC’s architectural service included in
its gross FDDEI is $67.5x, which is equal to
DC’s gross income from the architectural
service ($75x) multiplied by 90%, which is
the percentage of the benefits of DC’s
architectural service that are conferred on R’s
operations outside the United States.
section 250(a)(1)(B) (including as
modified by section 250(a)(3)(B))
multiplied by the sum of the amount
described in paragraph (b)(1)(i)(A)(2) of
this section and the amount described
in paragraph (b)(1)(i)(A)(3) of this
section that is attributable to the amount
described in paragraph (b)(1)(i)(A)(2) of
this section.
*
*
*
*
*
(d) Applicability dates. Except as
otherwise provided in this paragraph
(d), paragraph (b)(1)(i) of this section
applies beginning the last taxable year
of a foreign corporation that begins
before January 1, 2018, and with respect
to a United States person, for the taxable
year in which or with which such
taxable year of the foreign corporation
ends. Paragraph (b)(1)(i)(B)(3) applies to
taxable years of a foreign corporation
ending on or after March 4, 2019, and
with respect to a United States person,
for the taxable year in which or with
which such taxable year of the foreign
corporation ends.
■ Par. 4. Section 1.1502–12, as
proposed to be amended in 83 FR 51072
(Oct. 10, 2018), is further amended by
adding paragraph (t) to read as follows:
Par. 3. Section 1.962–1 is amended by
adding paragraphs (b)(1)(i)(A)(2),
(b)(1)(i)(B)(3), and revising paragraph (d)
to read as follows:
§ 1.1502–13
■
§ 1.962–1 Limitation of tax for individuals
on amounts included in gross income
under section 951(a).
*
*
*
*
*
(b) * * *
(1) * * *
(i) * * *
(A) * * *
(2) His GILTI inclusion amount (as
defined in § 1.951A–1(c)(1)) for the
taxable year; plus
*
*
*
*
*
(B) * * *
(3) The portion of the deduction
under section 250 and § 1.250(a)–1 that
would be allowed to a domestic
corporation equal to the percentage
applicable to global intangible lowtaxed income for the taxable year under
PO 00000
Frm 00043
Fmt 4701
Sfmt 4702
§ 1.1502–12
Separate taxable income.
*
*
*
*
*
(t) See § 1.1502–50 for rules relating to
the computation of a member’s
deduction under section 250.
■ Par. 5. Section 1.1502–13, as
proposed to be amended in 83 FR 67490
(Dec. 28, 2018), is further amended:
■ 1. In paragraph (a)(6)(ii), under the
heading ‘‘Matching rule. (§ 1.1502–
13(c)(7)(ii))’’, by adding entry (T); and
■ 2. Adding paragraph (c)(7)(ii)(T).
The additions read as follows:
Intercompany transactions.
(a) * * *
(6) * * *
(ii) * * *
Matching rule. (§ 1.1502–13(c)(7)(ii))
*
*
*
*
*
(T) Example 20. Redetermination of
attributes for section 250 purposes.
*
*
*
*
*
(c) * * *
(7) * * *
(ii) * * *
(T) Example 20: Redetermination of
attributes for section 250 purposes—(1)
Facts. S manufactures equipment in the
United States and recognizes $75 of gross
income included in gross DEI (as defined in
§ 1.250(b)–1(c)(14)) on the sale of Asset,
which is not depreciable property, to B in
Year 1 for $100. In Year 2, B sells Asset to
X for $125 and recognizes $25 of gross
income. The sale is a FDDEI sale (as defined
in § 1.250(b)–1(c)(8)), and thus the $25 of
income is included in B’s gross FDDEI (as
defined in § 1.250(b)–1(c)(15)) for Year 2.
E:\FR\FM\06MRP2.SGM
06MRP2
8230
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
(2) Timing and attributes. S’s $75 of
intercompany income is taken into account
in Year 2 under the matching rule to reflect
the $75 difference between B’s $25
corresponding item taken into account (based
on B’s $100 cost basis in Asset) and the
recomputed corresponding item (based on
the $25 basis that B would have if S and B
were divisions of a single corporation and B’s
basis were determined by reference to S’s
basis). In determining whether S’s gross
income included in gross DEI from the sale
of Asset is included in gross FDDEI, S and
B are treated as divisions of a single
corporation. See paragraph (a)(6) of this
section. In determining the amount of income
included in gross DEI that is included in
gross FDDEI, the attributes of S’s
intercompany item and B’s corresponding
item may be redetermined to the extent
necessary to produce the same effect on
consolidated taxable income (and
consolidated tax liability) as if S and B were
divisions of a single corporation. See
paragraph (c)(1)(i) of this section. Applying
section 250 and § 1.1502–50 on a single
entity basis, all $100 of income included in
gross DEI would be gross FDDEI. On a
separate entity basis, S would have $75 of
gross income included in gross DEI that is
included in gross non-FDDEI (as defined in
§ 1.250(b)–1(c)(16)) and B would have $25 of
gross income included in gross DEI that is
included in gross FDDEI. Thus, on a separate
entity basis, S and B would have, in the
aggregate, $100 of gross income included in
gross DEI, of which only $25 is included
gross FDDEI. Accordingly, under single
entity treatment, $75 that would be treated as
gross income included in gross DEI that is
included in gross non-FDDEI on a separate
entity basis is redetermined to be included in
gross FDDEI.
(3) Intercompany sale for loss. The facts are
the same as in paragraph (c)(7)(ii)(T)(1) (the
facts in Example 20), except that S recognizes
$25 of loss on the sale of Asset. S’s $25 of
intercompany loss is taken into account
under the matching rule to reflect the $25
difference between B’s $25 corresponding
item taken into account (based on B’s $100
cost basis in Asset) and the recomputed
corresponding item (based on the $125 basis
that B would have if S and B were divisions
of a single corporation and B’s basis were
determined by reference to S’s $125 of costs).
Applying section 250 and § 1.1502–50 on a
single entity basis, $0 of income would be
included in gross DEI. In order to reflect this
result, under the matching rule, S’s $25 loss
is allocated and apportioned solely to B’s $25
of gross income from the sale of Asset for
purposes of determining B’s DEI and FDDEI.
Furthermore, B’s $25 of gross income is not
taken into account for purposes of
apportioning any other deductions under
section 861 and the regulations under that
section for purposes of determining any
member’s DEI or FDDEI.
*
*
*
*
*
Par. 6. Section 1.1502–50 is added to
read as follows:
■
§ 1.1502–50
Consolidated section 250.
(a) In general—(1) Scope. This section
provides rules for applying section 250
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
and the regulations thereunder (the
section 250 regulations, see §§ 1.250(a)–
1 through 1.250(b)–6) to a member of a
consolidated group (member). Paragraph
(b) of this section provides rules for the
determination of the amount of the
deduction allowed to a member under
section 250(a)(1). Paragraph (c) of this
section provides rules governing the
impact of intercompany transactions on
the determination of a member’s
qualified business asset investment and
the effect of intercompany transactions
on the determination of a member’s
foreign-derived deduction eligible
income. Paragraph (d) of this section
provides rules governing basis
adjustments to member stock resulting
from the application of paragraph (b)(1)
of this section. Paragraph (e) of this
section provides definitions. Paragraph
(f) of this section provides examples
illustrating the rules of this section.
Paragraph (g) of this section provides an
applicability date.
(2) Overview. The rules of this section
ensure that the aggregate amount of
deductions allowed under section 250
to members appropriately reflects the
income, expenses, gains, losses, and
property of all members. Paragraph (b)
of this section allocates the consolidated
group’s overall deduction amount under
section 250 to each member on the basis
of its contribution to the consolidated
foreign-derived deduction eligible
income and consolidated global
intangible low-taxed income. The
definitions in paragraph (e) of this
section provide for the aggregation of
the deduction eligible income, foreignderived deduction eligible income,
deemed tangible income return, and
global intangible low-taxed income of
all members in order to calculate the
consolidated group’s overall deduction
amount under section 250.
(b) Allowance of deduction—(1) In
general. A member is allowed a
deduction for a consolidated return year
under section 250. See § 1.250(a)–1(b).
The amount of the deduction is equal to
the sum of—
(i) The product of the consolidated
FDII deduction amount and the
member’s FDII deduction allocation
ratio; and
(ii) The product of the consolidated
GILTI deduction amount and the
member’s GILTI deduction allocation
ratio.
(2) Consolidated taxable income
limitation. For purposes of applying the
limitation described in § 1.250(a)–
1(b)(2) to the determination of the
consolidated FDII deduction amount
and the consolidated GILTI deduction
amount of a consolidated group for a
consolidated return year—
PO 00000
Frm 00044
Fmt 4701
Sfmt 4702
(i) The consolidated foreign-derived
intangible income (if any) is reduced
(but not below zero) by an amount
which bears the same ratio to the
consolidated section 250(a)(2) amount
that such consolidated foreign-derived
intangible income bears to the sum of
the consolidated foreign-derived
intangible income and the consolidated
global intangible low-taxed income; and
(ii) The consolidated global intangible
low-taxed income (if any) is reduced
(but not below zero) by the excess of the
consolidated section 250(a)(2) amount
over the reduction described in
paragraph (b)(2)(i) of this section.
(c) Impact of intercompany
transactions—(1) Impact on qualified
business asset investment
determination. For purposes of
determining a member’s qualified
business asset investment, the basis of
specified tangible property does not
include an amount equal to any gain or
loss realized with respect to such
property by another member in an
intercompany transaction (as defined in
§ 1.1502–13(b)(1)), whether or not such
gain or loss is deferred. Thus, for
example, if a selling member owns
specified tangible property with an
adjusted basis (within the meaning of
section 1011) of $60x and an adjusted
basis (for purposes of calculating
qualified business asset investment) of
$80x, and sells it for $50x to the
purchasing member, the basis of such
property for purposes of computing the
purchasing member’s qualified business
asset investment is $80x.
(2) Impact on foreign-derived
deduction eligible income
characterization. For purposes of
redetermining attributes of members
from an intercompany transaction as
foreign-derived deduction eligible
income, see § 1.1502–13(c)(1)(i) and
(c)(7)(ii)(T), Example 20.
(d) Adjustments to the basis of a
member. For adjustments to the basis of
a member related to paragraph (b)(1) of
this section, see § 1.1502–32(b)(3)(ii)(B).
(e) Definitions. The following
definitions apply for purposes of this
section.
(1) Consolidated deduction eligible
income. With respect to a consolidated
group for a consolidated return year, the
term consolidated deduction eligible
income means the greater of the sum of
the deduction eligible income (whether
positive or negative) of all members or
zero.
(2) Consolidated deemed intangible
income. With respect to a consolidated
group for a consolidated return year, the
term consolidated deemed intangible
income means the excess (if any) of the
consolidated deduction eligible income,
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
over the consolidated deemed tangible
income return.
(3) Consolidated deemed tangible
income return. With respect to a
consolidated group for a consolidated
return year, the term consolidated
deemed tangible income return means
the sum of the deemed tangible income
return of all members.
(4) Consolidated FDII deduction
amount. With respect to a consolidated
group for a consolidated return year, the
term consolidated FDII deduction
amount means the product of the FDII
deduction rate and the consolidated
foreign-derived intangible income, as
adjusted by paragraph (b)(2) of this
section.
(5) Consolidated foreign-derived
deduction eligible income. With respect
to a consolidated group for a
consolidated return year, the term
consolidated foreign-derived deduction
eligible income means the greater of the
sum of the foreign-derived deduction
eligible income (whether positive or
negative) of all members or zero.
(6) Consolidated foreign-derived
intangible income. With respect to a
consolidated group for a consolidated
return year, the term consolidated
foreign-derived intangible income
means, except as provided in paragraph
(e) of this section, the product of the
consolidated deemed intangible income
and the consolidated foreign-derived
ratio.
(7) Consolidated foreign-derived ratio.
With respect to a consolidated group for
a consolidated return year, the term
consolidated foreign-derived ratio
means the ratio (not to exceed one) of—
(i) The consolidated foreign-derived
deduction eligible income; to
(ii) The consolidated deduction
eligible income.
(8) Consolidated GILTI deduction
amount. With respect to a consolidated
group for a consolidated return year, the
term consolidated GILTI deduction
amount means the product of the GILTI
deduction rate and the sum of the
consolidated global intangible low-taxed
income, as adjusted by paragraph (b)(2)
of this section, and the amounts treated
as dividends received by the members
under section 78 which are attributable
to their global intangible low-taxed
income for the consolidated return year.
(9) Consolidated global intangible
low-taxed income. With respect to a
consolidated group for a consolidated
return year, the term consolidated
global intangible low-taxed income
means the sum of the global intangible
low-taxed income of all members.
(10) Consolidated section 250(a)(2)
amount. With respect to a consolidated
group for a consolidated return year, the
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
term consolidated section 250(a)(2)
amount means the excess (if any) of the
sum of the consolidated foreign-derived
intangible income and the consolidated
global intangible low-taxed income
(determined without regard to section
250(a)(2) and paragraph (b)(2) of this
section), over the consolidated taxable
income of the consolidated group
(within the meaning of § 1.1502–11)
determined with regard to all items of
income, deductions, or loss, except for
the deduction allowed under section
250 and this section. Therefore, for
example, consolidated taxable income
under this paragraph (f)(10) is
determined taking into account the
application of sections 163(j) and 172(a).
(11) Deduction eligible income. With
respect to a member for a consolidated
return year, the term deduction eligible
income means the member’s gross DEI
for the year (within the meaning of
§ 1.250(b)–1(c)(14)) reduced (including
below zero) by the deductions properly
allocable to gross DEI for the year (as
determined under § 1.250(b)–1(d)(2)).
(12) Deemed tangible income return.
With respect to a member for a
consolidated return year, the term
deemed tangible income return means
an amount equal to 10 percent of the
member’s qualified business asset
investment, as adjusted by paragraph
(c)(1) of this section.
(13) FDII deduction allocation ratio.
With respect to a member for a
consolidated return year, the term FDII
deduction allocation ratio means the
ratio of—
(i) The member’s positive foreignderived deduction eligible income (if
any); to
(ii) The sum of the positive foreignderived deduction eligible income of all
members.
(14) FDII deduction rate. The term
FDII deduction rate means 37.5 percent
for consolidated return years beginning
before January 1, 2026, and 21.875
percent for consolidated return years
beginning after December 31, 2025.
(15) Foreign-derived deduction
eligible income. With respect to a
member for a consolidated return year,
the term foreign-derived deduction
eligible income means the member’s
gross FDDEI for the year (within the
meaning of § 1.250(b)–1(c)(15)) reduced
(including below zero) by the
deductions properly allocable to gross
FDDEI for the year (as determined under
§ 1.250(b)–1(d)(2)).
(16) GILTI deduction allocation ratio.
With respect to a member for a
consolidated return year, the term GILTI
deduction allocation ratio means the
ratio of—
PO 00000
Frm 00045
Fmt 4701
Sfmt 4702
8231
(i) The sum of the member’s global
intangible low-taxed income and the
amount treated as a dividend received
by the member under section 78 which
is attributable to its global intangible
low-taxed income for the consolidated
return year; to
(ii) The sum of consolidated global
intangible low-taxed income and the
amounts treated as dividends received
by the members under section 78 which
are attributable to their global intangible
low-taxed income for the consolidated
return year.
(17) GILTI deduction rate. The term
GILTI deduction rate means 50 percent
for consolidated return years beginning
before January 1, 2026, and 37.5 percent
for consolidated return years beginning
after December 31, 2025.
(18) Global intangible low-taxed
income. With respect to a member for a
consolidated return year, the term global
intangible low-taxed income means the
sum of the member’s GILTI inclusion
amount under § 1.1502–51(b) and the
member’s distributive share of any
domestic partnership’s GILTI inclusion
amount under § 1.951A–5(b)(2).
(19) Qualified business asset
investment. The term qualified business
asset investment has the meaning
provided in § 1.250(b)–2(b).
(20) Specified tangible property. The
term specified tangible property has the
meaning provided in § 1.250(b)–2(c)(1).
(f) Examples. The following examples
illustrate the rules of this section.
(1)Example 1: Calculation of deduction
attributable to foreign-derived intangible
income—(i) Facts. P is the common parent of
the P group and owns all of the only class
of stock of subsidiaries USS1 and USS2. The
consolidated return year of all persons is the
calendar year. In 2018, P has deduction
eligible income of $400x, foreign-derived
deduction eligible income of $0, and
qualified business asset investment of $0;
USS1 has deduction eligible income of
$200x, foreign-derived deduction eligible
income of $200x, and qualified business asset
investment of $600x; and USS2 has
deduction eligible income of ¥$100x,
foreign-derived deduction eligible income of
$100x, and qualified business asset
investment of $400x. The P group has
consolidated taxable income that is sufficient
to make inapplicable the limitation in
paragraph (b)(2) of this section. No member
of the P group has global intangible lowtaxed income.
(ii) Analysis. (A) Consolidated deduction
eligible income. Under paragraph (e)(1) of
this section, the P group’s consolidated
deduction eligible income is $500x, the
greater of the sum of the deduction eligible
income (whether positive or negative) of all
members ($400x + $200x–$100x) or zero.
(B) Consolidated foreign-derived deduction
eligible income. Under paragraph (e)(5) of
this section, the P group’s consolidated
foreign-derived deduction eligible income is
E:\FR\FM\06MRP2.SGM
06MRP2
8232
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
$300x, the greater of the sum of the foreignderived deduction eligible income (whether
positive or negative) of all members ($0 +
$200x + $100x) or zero.
(C) Consolidated deemed tangible income
return. Under paragraph (e)(12) of this
section, a member’s deemed tangible income
return is 10% of its qualified business asset
investment. Therefore, P’s deemed tangible
income return is $0 (0.10 × $0), USS1’s
deemed tangible income return is $60x (0.10
× $600x), and USS2’s deemed tangible
income return is $40x (0.10 × $400x). Under
paragraph (e)(3) of this section, the P group’s
consolidated deemed tangible income return
is $100x, the sum of the deemed tangible
income return of all members ($0 + $60x +
$40x).
(D) Consolidated deemed intangible
income. Under paragraph (e)(2) of this
section, the P group’s consolidated deemed
intangible income is $400x, the excess of its
consolidated deduction eligible income over
its consolidated deemed tangible income
return ($500x¥$100x).
(E) Consolidated foreign-derived intangible
income. Under paragraph (e)(7) of this
section, the P group’s consolidated foreignderived ratio is 0.60, the ratio of its
consolidated foreign-derived deduction
eligible income to its consolidated deduction
eligible income ($300x/$500x). Under
paragraph (e)(6) of this section, the P group’s
consolidated foreign-derived intangible
income is $240x, the product of its
consolidated deemed intangible income and
its consolidated foreign-derived ratio ($400x
× 0.60).
(F) Consolidated FDII deduction amount.
Under paragraph (e)(4) of this section, the P
group’s consolidated FDII deduction amount
is $90x, the product of the FDII deduction
rate and the consolidated foreign-derived
intangible income (0.375 × $240x).
(G) Member’s deduction attributable to
consolidated FDII deduction amount. Under
paragraph (b)(1) of this section, a member is
allowed a deduction equal, in part, to the
product of the consolidated FDII deduction
amount of the consolidated group to which
the member belongs and the member’s FDII
deduction allocation ratio. Under paragraph
(e)(13) of this section, a member’s FDII
deduction allocation ratio is the ratio of its
positive foreign-derived deduction eligible
income to the sum of each member’s positive
foreign-derived deduction eligible income for
such consolidated return year. As a result,
the FDII deduction allocation ratios of P,
USS1, and USS2 are 0 ($0/$300x), 2⁄3 ($200x/
$300x), and 1/3 ($100x/$300x), respectively.
Therefore, P, USS1, and USS2 are permitted
deductions under paragraph (b)(1) of this
section in the amount of $0 (0 × $90x), $60x
(2/3 × $90x), and $30x (1/3 × $90x),
respectively.
(2) Example 2: Limitation on consolidated
foreign-derived deduction eligible income—
(i) Facts. The facts are the same as in
paragraph (f)(1)(i) of this section (the facts in
Example 1), except that P’s foreign-derived
deduction eligible income is $300x.
(ii) Analysis. (A) Consolidated deduction
eligible income and consolidated deemed
tangible income return. As in paragraphs
(f)(1)(ii)(A) and (C) of this section (the
VerDate Sep<11>2014
20:58 Mar 05, 2019
Jkt 247001
analysis in Example 1), the P group’s
consolidated deduction eligible income is
$500x and the P group’s consolidated
deemed tangible income return is $100x.
(B) Consolidated foreign-derived deduction
eligible income. Under paragraph (e)(5) of
this section, the P group’s consolidated
foreign-derived deduction eligible income is
$600x, the greater of the sum of the foreignderived deduction eligible income (whether
positive or negative) of all members ($300x
+ $200x + $100x) or zero.
(C) Consolidated deemed intangible
income and consolidated foreign-derived
intangible income. Under paragraph (e)(2) of
this section, the P group’s consolidated
deemed intangible income is $400x
($500x¥$100x). Under paragraph (e)(7) of
this section, the P group’s consolidated
foreign-derived ratio is 1.00 ($600x/$500x,
but not in excess of one). Under paragraph
(e)(6) of this section, the P group’s
consolidated foreign-derived intangible
income is $400x ($400x × 1.00).
(D) Consolidated FDII deduction amount
and member’s deduction attributable to
consolidated FDII deduction amount. Under
paragraph (e)(4) of this section, the P group’s
consolidated FDII deduction amount is $150x
(0.375 × $400x). Under paragraph (e)(13) of
this section, the FDII deduction allocation
ratios of P, USS1, and USS2 are 1/2 ($300/
$600x), 1/3 ($200x/$600x), and 1/6 ($100x/
$600x), respectively. Therefore, P, USS1, and
USS2 are permitted deductions under
paragraph (b)(1) of this section in the
amounts of $75x (1/2 × $150x), $50x (1/3 ×
$150x), and $25x (1/6 × $150x), respectively.
(3) Example 3: Member with negative
foreign-derived deduction eligible income—
(i) Facts. The facts are the same as in
paragraph (f)(1)(i) of this section (the facts in
Example 1), except that P’s foreign-derived
deduction eligible income is ¥$100x.
(ii) Analysis. (A) Consolidated deduction
eligible income and consolidated deemed
tangible income return. As in paragraphs
(f)(1)(ii)(A) and (C) of this section (the facts
in Example 1), the P group’s consolidated
deduction eligible income is $500x and the
P group’s consolidated deemed tangible
income return is $100x.
(B) Consolidated foreign-derived deduction
eligible income. Under paragraph (e)(5) of
this section, the P group’s consolidated
foreign-derived deduction eligible income is
$200x, the greater of the sum of the foreignderived deduction eligible income (whether
positive or negative) of all members (¥$100x
+ $200x + $100x) or zero.
(C) Consolidated deemed intangible
income and consolidated foreign-derived
intangible income. Under paragraphs (e)(2)
and (6) of this section, the P group’s
consolidated deemed intangible income is
$400x ($500x¥$100x), and the P group’s
consolidated foreign-derived intangible
income is $160x ($400x × ($200x/$500x)).
(D) Consolidated FDII deduction amount
and member’s deduction attributable to
consolidated FDII deduction amount. Under
paragraph (e)(4) of this section, the P group’s
consolidated FDII deduction amount is $60x
(0.375 × $160x). Under paragraph (e)(13) of
this section, the FDII deduction allocation
ratios of P, USS1, and USS2 are 0 ($0/$300x),
PO 00000
Frm 00046
Fmt 4701
Sfmt 4702
2/3 ($200x/$300x), and 1/3 ($100x/$300x),
respectively. Therefore, P, USS1, and USS2
are permitted deductions under paragraph
(b)(1) of this section in the amounts of $0 (0
x $60x), $40x (2/3 × $60x), and $20x (1/3 ×
$60x), respectively.
(4) Example 4: Calculation of deduction
attributable to global intangible low-taxed
income—(i) Facts. The facts are the same as
in paragraph (f)(1)(i) of this section (the facts
in Example 1), except that USS1 owns CFC1
and USS2 owns CFC2. USS1 and USS2 have
global intangible low-taxed income of $65x
and $20x, respectively, and amounts treated
as dividends received under section 78
attributable to their global intangible lowtaxed income of $10x and $5x, respectively.
(ii) Analysis. (A) Consolidated global
intangible low-taxed income. Under
paragraph (e)(9) of this section, the P group’s
consolidated global intangible low-taxed
income is $85x, the sum of the global
intangible low-taxed income of all members
($0 + $65x + $20x).
(B) Consolidated GILTI deduction amount.
Under paragraph (e)(8) of this section, the P
group’s consolidated GILTI deduction
amount is $50x, the product of the GILTI
deduction rate and the sum of its
consolidated global intangible low-taxed
income and the amounts treated as dividends
received by the members under section 78
which are attributable to their global
intangible low-taxed income for the
consolidated return year (0.50 x ($85x + $10x
+ $5x)).
(C) Member’s deduction attributable to
consolidated GILTI deduction amount. Under
paragraph (b)(1) of this section, a member is
allowed a deduction equal, in part, to the
product of the consolidated GILTI deduction
amount of the consolidated group to which
the member belongs and the member’s GILTI
deduction allocation ratio. Under paragraph
(e)(16) of this section, a member’s GILTI
deduction allocation ratio is the ratio of the
sum of its global intangible low-taxed income
and the amount treated as a dividend
received by the member under section 78
which is attributable to its global intangible
low-taxed income for the consolidated return
year to the sum of the consolidated global
intangible low-taxed income and the
amounts treated as dividends received by the
members under section 78 which are
attributable to their global intangible lowtaxed income for the consolidated return
year. As a result, the GILTI deduction
allocation ratios of P, USS1, and USS2 are 0
($0/($85x + $10x + $5x)), 3/4 (($65x + $10x)/
($85x + $10x + $5x)), and 1/4 (($20x + $5x)/
($85x + $10x + $5x)), respectively. Therefore,
P, USS1, and USS2 are permitted deductions
of $0 (0 × $50x), $37.50x (3/4 × $50x), and
$12.50x (1/4 × $50x), respectively.
(D) Member’s deduction under section 250.
Under paragraph (b)(1) of this section, a
member is allowed a deduction equal to the
sum of the member’s deduction attributable
to the consolidated FDII deduction amount
and the member’s deduction attributable to
the consolidated GILTI deduction amount.
As a result P, USS1, and USS2 are entitled
to deductions under paragraph (b)(1) of this
section of $0 ($0 + $0), $97.50x ($60x +
$37.50x), and $42.50x ($30x + $12.50x),
respectively.
E:\FR\FM\06MRP2.SGM
06MRP2
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
(5) Example 5: Taxable income
limitation—(i) Facts. The facts are the same
as in paragraph (f)(4)(i) of this section (the
facts in Example 4), except that the P group’s
consolidated taxable income (within the
meaning of paragraph (e)(10) of this section)
is $300x.
(ii) Analysis. (A) Determination of whether
the limitation described in paragraph (b)(2)
of this section applies. Under paragraph
(b)(2) of this section, in the case of a
consolidated group with a consolidated
section 250(a)(2) amount for a consolidated
year, the amount of the consolidated foreignderived intangible income and the
consolidated global intangible low-taxed
income otherwise taken into account in the
determination of the consolidated FDII
deduction amount and the consolidated
GILTI deduction amount are subject to
reduction. As in paragraph (f)(1)(ii)(E) of this
section (the facts in Example 1), the P group’s
consolidated foreign-derived intangible
income is $240x. As in paragraph (f)(4)(ii)(A)
of this section (the analysis in Example 4),
the P group’s consolidated global intangible
low-taxed income is $85x. The P group’s
consolidated taxable income is $300x. Under
paragraph (e)(10) of this section, the P
group’s consolidated section 250(a)(2)
amount is $25x (($240x + $85x)¥$300x), the
excess of the sum of the consolidated foreignderived intangible income and the
consolidated global intangible low-taxed
income, over the P group’s consolidated
taxable income. Therefore, the limitation
described in paragraph (b)(2) of this section
applies.
(B) Allocation of reduction. Under
paragraph (b)(2)(i) of this section, the P
group’s consolidated foreign-derived
intangible income is reduced by an amount
which bears the same ratio to the
consolidated section 250(a)(2) amount as the
consolidated foreign-derived intangible
income bears to the sum of the consolidated
foreign-derived intangible income and
consolidated global intangible low-taxed
income, and the P group’s consolidated
global intangible low-taxed income is
reduced by the excess of the consolidated
section 250(a)(2) amount over the reduction
described in paragraph (b)(2)(i) of this
section. Therefore, for purposes of
determining the P group’s consolidated FDII
deduction amount and consolidated GILTI
deduction amount, its consolidated foreignderived intangible income is reduced to
$221.54x ($240x ¥ ($25x × ($240x/$325x)))
and its consolidated global intangible lowtaxed income is reduced to $78.46x ($85x ¥
($25x ¥ ($25x × ($240x/$325x)))).
(C) Calculation of consolidated FDII
deduction amount and consolidated GILTI
deduction amount. Under paragraph (e)(4) of
this section, the P group’s consolidated FDII
deduction amount is $83.08x ($221.54x ×
0.375). Under paragraph (e)(8) of this section,
the P group’s consolidated GILTI deduction
amount is $39.23x ($78.46x × 0.50).
(D) Member’s deduction attributable to the
consolidated FDII deduction amount. As in
paragraph (f)(1)(ii)(G) of this section (the
analysis in Example 1), the FDII deduction
allocation ratios of P, USS1, and USS2 are 0,
2/3, and 1/3, respectively. Therefore, P,
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
USS1, and USS2 are permitted deductions
attributable to the consolidated FDII
deduction amount of $0 (0 × $83.08x),
$55.39x (2/3 × $83.08x), and $27.69x (1/3 ×
$83.08x), respectively.
(E) Member’s deduction attributable to the
consolidated GILTI deduction amount. As in
paragraph (f)(4)(ii)(C) of this section (the
analysis in Example 4), the GILTI deduction
allocation ratios of P, USS1, and USS2 are 0,
3/4, and 1/4, respectively. Therefore, P,
USS1, and USS2 are permitted deductions
attributable to the consolidated GILTI
deduction amount of $0 (0 × $39.23x),
$29.42x (3/4 × $39.23x), and $9.81x (1/4 ×
$39.23x), respectively.
(F) Member’s deduction pursuant section
250. Under paragraph (b)(1) of this section,
a member is allowed a deduction equal to the
sum of the member’s deduction attributable
to consolidated FDII deduction amount and
the member’s deduction attributable to
consolidated GILTI deduction amount. As a
result P, USS1, and USS2 are entitled to
deductions under paragraph (b)(1) of this
section of $0 ($0 + $0), $84.81x ($55.39x +
$29.42x), and $37.50x ($27.69x + $9.81x),
respectively.
(g) Applicability date. This section
applies to consolidated return years
ending on or after the date of
publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register.
■ Par. 7. Section 1.6038–2, as proposed
to be amended at 83 FR 67612 (Dec. 28,
2018), is further amended by adding
paragraph (f)(15) and a sentence at the
end of paragraph (m) to read as follows:
§ 1.6038–2 Information returns required of
United States persons with respect to
annual accounting periods of certain
foreign corporations beginning after
December 31, 1962.
*
*
*
*
*
(f) * * *
(15) Information reporting under
section 250. If the person required to file
Form 5471 (or any successor form)
claims a deduction under section 250(a)
that is determined, in whole or part, by
reference to its foreign-derived
intangible income, and any amount
required to be reported under paragraph
(f)(11) of this section is included in its
computation of foreign-derived
deduction eligible income, such person
will provide on Form 5471 (or any
successor form) such information that is
prescribed by the form, instructions,
publication, or other guidance.
*
*
*
*
*
(m) * * * Paragraph (f)(15) of this
section applies with respect to
information for annual accounting
periods beginning on or after March 4,
2019.
■ Par. 8. Section 1.6038–3, as proposed
to be amended at 83 FR 67612 (Dec. 28,
2018), is further amended by adding
PO 00000
Frm 00047
Fmt 4701
Sfmt 4702
8233
paragraph (g)(4) and a sentence to the
end of paragraph (l) to read as follows:
§ 1.6038–3 Information returns required of
certain United States persons with respect
to controlled foreign partnerships (CFPs).
*
*
*
*
*
(g) * * *
(4) Additional information required to
be submitted by a controlling tenpercent or a controlling fifty-percent
partner that has a deduction under
section 250 by reason of FDII. In
addition to the information required
pursuant to paragraphs (g)(1), (2), and
(3) of this section, if, with respect to the
partnership’s tax year for which the
Form 8865 is being filed, a controlling
ten-percent partner or a controlling fiftypercent partner has a deduction under
section 250 (by reason of having foreignderived intangible income), determined,
in whole or in part, by reference to the
income, assets, or activities of the
partnership, or transactions between the
controlling-ten percent partner or
controlling fifty-percent partner and the
partnership, the controlling ten-percent
partner or controlling fifty-percent
partner must provide its share of the
partnership’s gross DEI, gross FDDEI,
deductions that are definitely related to
the partnership’s gross DEI and gross
FDDEI, and partnership QBAI (as those
terms are defined in the section 250
regulations) in the form and manner and
to the extent prescribed by Form 8865
(or any successor form), instruction,
publication, or other guidance.
*
*
*
*
*
(l) * * * Paragraph (g)(4) of this
section applies for tax years of a foreign
partnership beginning on or after March
4, 2019.
■ Par. 9. Section 1.6038A–2, as
proposed to be amended at 83 FR 67612
(Dec. 28, 2018), is further amended by
adding paragraph (b)(5)(iv) and a
sentence at the end of paragraph (g) to
read as follows:
§ 1.6038A–2
Requirements of return.
*
*
*
*
*
(b) * * *
(5) * * *
(iv) Information reporting under
section 250. If, for the taxable year, the
reporting corporation has a deduction
under section 250 (by reason of having
foreign-derived intangible income) with
respect to any amount required to be
reported under paragraph (b)(3) or (4) of
this section, the reporting corporation
will provide on Form 5472 (or any
successor form) such information about
the deduction in the form and manner
and to the extent prescribed by Form
5472 (or any successor form),
E:\FR\FM\06MRP2.SGM
06MRP2
8234
Federal Register / Vol. 84, No. 44 / Wednesday, March 6, 2019 / Proposed Rules
instruction, publication, or other
guidance.
*
*
*
*
*
(g) * * * Paragraph (b)(5)(iv) of this
section applies with respect to
information for annual accounting
periods beginning on or after March 4,
2019.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2019–03848 Filed 3–4–19; 4:15 pm]
BILLING CODE 4830–01–P
VerDate Sep<11>2014
18:44 Mar 05, 2019
Jkt 247001
PO 00000
Frm 00048
Fmt 4701
Sfmt 9990
E:\FR\FM\06MRP2.SGM
06MRP2
Agencies
[Federal Register Volume 84, Number 44 (Wednesday, March 6, 2019)]
[Proposed Rules]
[Pages 8188-8234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03848]
[[Page 8187]]
Vol. 84
Wednesday,
No. 44
March 6, 2019
Part III
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Part 1
Deduction for Foreign-Derived Intangible Income and Global Intangible
Low-Taxed Income; Proposed Rule
Federal Register / Vol. 84 , No. 44 / Wednesday, March 6, 2019 /
Proposed Rules
[[Page 8188]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-104464-18]
RIN 1545-BO55
Deduction for Foreign-Derived Intangible Income and Global
Intangible Low-Taxed Income
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations that provide
guidance to determine the amount of the deduction for foreign-derived
intangible income and global intangible low-taxed income. This document
also contains proposed regulations coordinating the deduction for
foreign-derived intangible income and global intangible low-taxed
income with other provisions in the Internal Revenue Code.
DATES: Written or electronic comments and requests for a public hearing
must be received by May 6, 2019.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-104464-18), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
104464-18), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224. Alternatively, taxpayers may submit
comments electronically via the Federal eRulemaking Portal at https://www.regulations.gov (REG-104464-18).
FOR FURTHER INFORMATION CONTACT: Concerning proposed Sec. Sec.
1.250(a)-1 through 1.250(b)-6, 1.962-1, 1.6038-2, 1.6038-3, and
1.6038A-2, Kenneth Jeruchim at (202) 317-6939; concerning proposed
Sec. Sec. 1.1502-12, 1.1502-13 and 1.1502-50, Michelle A. Monroy at
(202) 317-5363 or Austin Diamond-Jones at (202) 317-6847; concerning
submissions of comments and requests for a public hearing, Regina L.
Johnson, (202) 317-6901 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 under
sections 250, 962, 1502, 6038, and 6038A (``proposed regulations'').
Section 14202(a) of the Tax Cuts and Jobs Act, Public Law 115-97 (2017)
(the ``Act''), added section 250 to the Internal Revenue Code (the
``Code'').\1\ The new section provides a domestic corporation with a
deduction (``section 250 deduction'') for its foreign-derived
intangible income (``FDII'') and its global intangible low-taxed income
(``GILTI'') and the amount treated as a dividend under section 78 which
is attributable to its GILTI. Section 14202(c) of the Act provides that
section 250 and the conforming amendments in section 14202(b) apply to
taxable years beginning after December 31, 2017.
---------------------------------------------------------------------------
\1\ Except as otherwise stated, all section references in this
preamble are to the Internal Revenue Code.
---------------------------------------------------------------------------
Section 14201(a) of the Act (codified in section 951A) requires a
United States shareholder (``U.S. shareholder'') of any controlled
foreign corporation (``CFC'') for any taxable year to include in gross
income the shareholder's GILTI for the year. The Department of the
Treasury (``Treasury Department'') and the IRS published a separate
notice of proposed rulemaking that provides guidance to U.S.
shareholders on how to determine the amount of GILTI to include in
gross income. See 83 FR 51072 (Oct. 10, 2018).
Section 14302(a) of the Act also added a new foreign tax credit
category for foreign branch income (defined in section 904(d)(2)(J)),
which is cross-referenced in section 250(b)(3)(A)(i)(VI). The Treasury
Department and the IRS published a separate notice of proposed
rulemaking that provides rules for determining a corporation's foreign
branch income for purposes of section 904. See 83 FR 63200 (Dec. 7,
2018).
Explanation of Provisions
I. Overview of Proposed Regulations
In general, income earned directly by a U.S. person on foreign
business income is subject to U.S. tax on a current basis. Before the
Act, foreign business income earned indirectly by a U.S. person through
a foreign corporation was not generally subject to U.S. tax until such
income was distributed as a dividend to the U.S. person. Certain anti-
deferral regimes could cause the U.S. owner to be taxed on a current
basis in the United States regardless of whether the income had been
distributed as a dividend to the U.S. owner. Sections 951 through 965
of the Code (generally referred to as the ``subpart F'' provisions),
applicable to certain passive and mobile categories of income earned by
CFCs, is the main anti-deferral regime of relevance to U.S.-based
corporate groups. However, because subpart F does not generally apply
to active foreign business income of a CFC (as defined in section
957(a)), U.S. shareholders before the Act could indefinitely defer U.S.
taxation with respect to their foreign business income--in particular,
mobile income arising from the exploitation of intangible property--by
allocating such income to its CFCs operating in low- or zero-tax
jurisdictions. This system of deferral, in turn, resulted in a ``lock-
out effect,'' whereby U.S. shareholders that had allocated income to
CFCs formed in low- or zero-tax jurisdictions could not repatriate such
income to the United States without incurring significant U.S. tax.
In order to facilitate the efficient redeployment of foreign
earnings in the United States, the Act established a participation
exemption system under which certain earnings of a foreign corporation
can be repatriated to a corporate U.S. shareholder without U.S. tax.
See section 14101(a) of the Act and section 245A. However, Congress
recognized that, without any base protection measures, the
participation exemption system could further incentivize taxpayers to
allocate intangible income to CFCs formed in low- or zero-tax
jurisdictions because the earnings related to such intangible income
could now be repatriated to the United States without incurring any
U.S. tax. See Senate Committee on the Budget, 115th Cong.,
``Reconciliation Recommendations Pursuant to H. Con. Res. 71,'' at 370
(Comm. Print 2017) (``Senate Explanation''). Therefore, Congress
enacted section 951A, which subjects a U.S. shareholder's ``global
intangible low-taxed income'' or ``GILTI'' (a new term created by the
Act) derived through its CFCs to U.S. tax on a current basis, similar
to the taxation of such CFCs' subpart F income under section
951(a)(1)(A).
Most member countries of the Organisation for Economic Co-operation
and Development (``OECD'') provide a full or partial (e.g., 95 percent)
participation exemption with respect to income of foreign subsidiaries
distributed to domestic shareholders. See OECD (2018), Tax Policy
Reforms 2018: OECD and Selected Partner Economies, at 73, OECD
Publishing, Paris (Sept. 2018). While some countries also have CFC
inclusion regimes similar to subpart F that subject certain narrow
classes of income of foreign subsidiaries to current tax in the home
country, many countries do not subject active foreign business income
of foreign subsidiaries to current tax. Congress recognized that taxing
such income at the full U.S. corporate tax rate could hurt the
competitive position of U.S. corporations relative to their foreign
peers, and therefore determined that GILTI earned by such corporations
[[Page 8189]]
should be subject to a reduced effective U.S. tax rate. See Senate
Explanation, at 370. Accordingly, Congress enacted section 250, which
provides corporate U.S. shareholders a deduction of 50 percent for
taxable years beginning after December 31, 2017, and before January 1,
2026, with respect to their GILTI, and the amount treated as a dividend
under section 78 which is attributable to their GILTI (``section 78
gross-up''). In contrast, a domestic corporation's inclusion of its
CFCs' subpart F income is not eligible for the section 250 deduction,
and is therefore generally subject to U.S. tax at the full corporate
rate.
After the Act, income earned directly by a domestic corporation is
subject to a 21 percent rate. Absent a deduction with respect to
intangible income attributable to foreign market activity earned
directly by a domestic corporation, the lower effective tax rate
applicable to GILTI by reason of the section 250 deduction would
perpetuate the pre-Act incentive for domestic corporations to allocate
intangible income to CFCs formed in low- or zero-tax jurisdictions.
Therefore, to neutralize the effect of providing a lower U.S. effective
tax rate with respect to the active earnings of a CFC of a domestic
corporation through a deduction for GILTI, section 250 provides a lower
effective U.S. tax rate with respect to ``foreign-derived intangible
income'' or ``FDII'' (a new term created by the Act) earned directly by
the domestic corporation through a deduction of 37.5 percent for
taxable years beginning after December 31, 2017, and before January 1,
2026. The result of the section 250 deduction for both GILTI and FDII
is to help neutralize the role that tax considerations play when a
domestic corporation chooses the location of intangible income
attributable to foreign-market activity, that is, whether to earn such
income through its U.S.-based operations or through its CFCs.
The proposed regulations provide guidance for determining the
amount of the section 250 deduction allowed to a domestic corporation
for its FDII and GILTI. Proposed Sec. 1.250(a)-1 provides rules for
determining the amount of the deduction, including rules for applying
the taxable income limitation of section 250(a)(2). Proposed Sec.
1.250(b)-1 provides general rules for computing a domestic
corporation's FDII. Proposed Sec. 1.250(b)-2 provides rules for
determining a domestic corporation's qualified business asset
investment (``QBAI''), which is a component of the computation of FDII.
Proposed Sec. 1.250(b)-3 provides general rules for determining gross
income included in gross foreign-derived deduction eligible income
(``gross FDDEI''), which is a component of the computation of FDII.
Proposed Sec. 1.250(b)-4 provides rules for determining gross FDDEI
from sales of property. Proposed Sec. 1.250(b)-5 provides rules for
determining gross FDDEI from the provision of a service. Proposed Sec.
1.250(b)-6 provides rules relating to the sale of property or the
provision of a service to a related party.
II. Amount of Deduction Allowed Under Section 250(a)
Proposed Sec. 1.250(a)-1 provides general rules to determine the
amount of a domestic corporation's section 250 deduction and associated
definitions that apply for purposes of the proposed regulations. The
section 250 deduction is available only to domestic corporations. See
section 250(a)(1) and proposed Sec. 1.250(a)-1(b)(1). For this
purpose, the term ``domestic corporation'' has the meaning set forth in
section 7701(a)--an association, joint-stock company, or insurance
company created or organized in the United States or under the law of
the United States or of any State--but does not include a regulated
investment company (as defined in section 851), a real estate
investment trust (as defined in section 856), or an S corporation (as
defined in section 1361). See proposed Sec. 1.250(a)-1(c)(1). The
section 250 deduction is not available to individuals except in certain
cases where an individual makes an election under section 962. See part
IV of this Explanation of Provisions section for more information about
that provision.
As discussed in part I of this Explanation of Provisions section,
the deduction under section 250 is generally intended to reduce the
effective rate of U.S. income tax on FDII and GILTI in order to help
neutralize the role that tax considerations play when a domestic
corporation chooses the location of intangible income attributable to
foreign-market activity. There is no indication that Congress intended
the section 250 deduction to reduce the effective rate of tax imposed
by non-income tax provisions outside of chapter 1 of the Internal
Revenue Code. Accordingly, for purposes of the excise tax imposed by
section 4940(a), the proposed regulations provide that a section 250
deduction is not treated as an ordinary and necessary expense paid or
incurred for the production or collection of gross investment income
within the meaning of section 4940(c)(3)(A). See proposed Sec.
1.250(a)-1(b)(4).
The section 250 deduction is subject to a taxable income
limitation. If, for any taxable year, the sum of a domestic
corporation's FDII and GILTI exceeds its taxable income, the excess is
allocated pro rata to reduce the corporation's FDII and GILTI solely
for purposes of computing the amount of the section 250 deduction. See
section 250(a)(2) and proposed Sec. 1.250(a)-1(b)(2). For this
purpose, a domestic corporation's taxable income is determined without
regard to the section 250 deduction. See section 250(a)(2)(A)(ii) and
proposed Sec. 1.250(a)-1(c)(4). The Code does not otherwise define
``taxable income'' for purposes of applying the taxable income
limitation of section 250(a)(2).
In general, a taxpayer's taxable income is based, in part, upon the
availability, and proper calculation, of deductions. However, multiple
Code provisions simultaneously limit the availability of a deduction
based, directly or indirectly, upon a taxpayer's taxable income,
including sections 163(j)(1) (limiting a deduction for business
interest) and 172(a)(2) (limiting a net operating loss deduction).
Sections 163(j)(2) and 172(b) also provide that any deduction not
allowed to a taxpayer for a taxable year by reason of the limitation in
section 163(j)(1) or 172(a)(2), respectively, may be allowed to the
taxpayer, subject to the same limitation, in its succeeding taxable
year. A taxpayer's net operating loss for a taxable year is determined
without regard to the section 250 deduction (see section 172(d)(9)),
and a taxpayer's adjusted taxable income is determined without regard
to section 172. See section 163(j)(8)(A)(iii). However, neither section
163(j) nor section 250 prescribes an ordering rule with respect to the
other provision.
The Treasury Department and the IRS considered proposing
computations requiring the use of simultaneous equations in lieu of an
ordering rule but determined that an approach that requires such
computations would result in undue administrative and compliance
burdens. Therefore, the proposed regulations provide an ordering rule
for applying sections 163(j) and 172 in conjunction with section 250
that the Treasury Department and the IRS have determined is consistent
with the statutory language for each provision. Specifically, the
proposed regulations provide that a domestic corporation's taxable
income for purposes of applying the taxable income limitation of
section 250(a)(2) is determined after all of the corporation's other
deductions are taken into account. See proposed Sec. 1.250(a)-1(c)(4).
Accordingly, a domestic
[[Page 8190]]
corporation's taxable income for purposes of section 250(a)(2) is its
taxable income determined without regard to section 250, but taking
into account the application of sections 163(j) and 172(a), including
amounts permitted to be carried forward to such taxable year by reason
of sections 163(j)(2) and 172(b).
Proposed regulations issued under section 163(j) provide guidance
on the interaction of sections 163(j) and 250 that the Treasury
Department and the IRS consider to be consistent with these proposed
regulations under section 250. See 83 FR 67490 (Dec. 28, 2018).
Specifically, the proposed regulations under section 163(j) provide
that, for purposes of determining the limitation under section 163(j),
a deduction under section 250(a)(1) that is properly allocable to a
non-excepted trade or business is taken into account in determining a
taxpayer's taxable income and thus its adjusted taxable income. See
proposed Sec. 1.163(j)-1(b)(37)(ii). However, for this purpose, the
taxpayer's deduction under section 250(a)(1) is determined without
regard to the limitations under sections 250(a)(2) and 163(j). See id.
As a result of these proposed regulations under section 250 and the
proposed regulations under section 163(j), a domestic corporation's
allowable business interest under section 163(j), its net operating
loss deduction under section 172(a), and its section 250 deduction are
determined in the following manner: First, a domestic corporation
computes the tentative amount of its FDII and the tentative amount of
its section 250 deduction (``tentative section 250 deduction'') taking
into account all deductions, but without regard to any carryforwards or
disallowances under section 163(j), the amount of any net operating
loss deduction under section 172(a), or the taxable income limitation
of section 250(a)(2) and proposed Sec. 1.250(a)-1(b)(2). Second, the
corporation computes the amount of its business interest allowed after
the application of section 163(j), for this purpose taking into account
the amount of its tentative section 250 deduction but without regard to
the amount of any net operating loss deduction under section 172(a).
See section 163(j)(8)(A)(iii) and proposed Sec. 1.163(j)-1(b)(1)(i)(B)
and (b)(37)(ii). Third, the corporation computes the amount of its net
operating loss deduction under section 172(a), for this purpose taking
into account the amount of its business interest allowed after
application of section 163(j) and the taxable income limitation of
section 172(a)(2), but without regard to the amount of its section 250
deduction (including its tentative section 250 deduction). See section
172(d)(9). Fourth, the corporation computes the amount of its FDII, for
this purpose taking into account the amount of its business interest
allowed after application of section 163(j) and the amount of its net
operating loss deduction under section 172(a) (determined in steps two
and three, respectively). See part III(A)(2) of this Explanation of
Provisions section for a discussion on the allocation of deductions to
gross DEI and gross FDDEI. Fifth, the corporation computes the amount
of its section 250 deduction after the application of the taxable
income limitation of section 250(a)(2) and proposed Sec. 1.250(a)-
1(b)(2), for this purpose taking into account the amount of its
business interest allowed after application of section 163(j) and the
amount of its net operating loss deduction under section 172(a). See
proposed Sec. 1.250(a)-1(f)(2) (Example 2), which illustrates the
interaction of sections 163(j), 172, and 250.
The Treasury Department and the IRS request comments on the
proposed ordering rule, as well as how the section 250 deduction should
be accounted for in determining adjusted taxable income at the
partnership level under section 163(j)(4)(A).
III. Determination of FDII
A. General Computational Rules
1. In General
A domestic corporation's FDII is the corporation's deemed
intangible income (``DII'') multiplied by the corporation's foreign-
derived ratio. Proposed Sec. 1.250(b)-1(b). A domestic corporation's
DII is the excess (if any) of the corporation's deduction eligible
income (``DEI'') over its deemed tangible income return (``DTIR'').
Proposed Sec. 1.250(b)-1(c)(3). A domestic corporation's DTIR is 10
percent of the corporation's QBAI. Proposed Sec. 1.250(b)-1(c)(4). The
foreign-derived ratio is the domestic corporation's ratio of foreign-
derived deduction eligible income (``FDDEI'') to DEI. Proposed Sec.
1.250(b)-1(c)(13).
2. Determination of DEI and FDDEI
A domestic corporation's DEI is the excess of its gross income
without regard to certain excluded items (``gross DEI'') over the
deductions properly allocable to gross DEI. See proposed Sec.
1.250(b)-1(c)(2). Gross DEI excludes six categories of gross income:
any amount included in gross income under section 951(a), GILTI,
financial services income, dividends from CFCs, domestic oil and gas
extraction income, and foreign branch income. See proposed Sec.
1.250(b)-1(c)(14). The proposed regulations clarify that, for this
purpose, a dividend includes any amount treated as a dividend under any
other provision of subtitle A of the Internal Revenue Code, including
the section 78 gross-up attributable to inclusions under sections
951(a) and 951A(a). See proposed Sec. 1.250(b)-1(c)(5). In addition,
the proposed regulations define foreign branch income by reference to
proposed Sec. 1.904-4(f), except that it also includes the sale,
directly or indirectly, of any asset (other than stock) that produces
gross income attributable to a foreign branch, including by reason of
the sale of a disregarded entity or partnership interest. See proposed
Sec. 1.250(b)-1(c)(11). The result is that income from the sale of any
such asset is not included in gross DEI.
For purposes of calculating the foreign-derived ratio, FDDEI is the
excess of gross FDDEI over deductions properly allocable to gross
FDDEI. See proposed Sec. 1.250(b)-1(c)(12). The proposed regulations
define gross FDDEI as the portion of a corporation's gross DEI that is
derived from all of its ``FDDEI sales'' and ``FDDEI services''
(collectively, ``FDDEI transactions''). See proposed Sec. 1.250(b)-
1(c)(8), (9), (10), and (15). The determination of whether a sale of
property or a provision of a service is a FDDEI sale or a FDDEI
service, respectively, is made under the provisions of proposed
Sec. Sec. 1.250(b)-3 through 1.250(b)-6. See part III(B) through (F)
of this Explanation of Provisions section. The portion of a
corporation's gross DEI that is not gross FDDEI is referred to as gross
non-FDDEI. See proposed Sec. 1.250(b)-1(c)(16). Therefore, all income
included in gross DEI is included in either gross FDDEI or gross non-
FDDEI, and all income included in either gross FDDEI or gross non-FDDEI
is included in gross DEI.
In the case of property produced or acquired for resale, gross
income is generally determined by subtracting cost of goods sold from
gross sales receipts. In determining the amount of gross income
included in gross DEI or gross FDDEI, cost of goods sold is attributed
to gross receipts with respect to gross DEI and gross FDDEI using any
reasonable method. See proposed Sec. 1.250(b)-1(d)(1). The proposed
regulations clarify that cost of goods sold that is associated with
activities undertaken in an earlier taxable year cannot be segregated
into component costs and attributed disproportionately to amounts
excluded from gross FDDEI or to amounts excluded from gross DEI. See
id. This is similar to the
[[Page 8191]]
clarification in proposed Sec. 1.199-4(b)(2)(iii)(A) and is intended
to preclude a method that attributes cost of goods sold of an inventory
item to gross receipts other than gross receipts included in the
computation of gross DEI or gross FDDEI if the gross receipts from the
sale of that item are included in the computation of amounts included
in the computation of gross DEI or gross FDDEI, respectively. See 80 FR
51978, 51990 (Aug. 27, 2015). The Treasury Department and the IRS
request comments on whether there are alternative approaches for
dealing with timing issues, and whether additional rules should be
provided for attributing cost of goods sold in determining gross DEI
and gross FDDEI. Cf. Sec. 1.199-4(b)(2) through (6).
Section 250(b)(3)(A) defines DEI as the excess of a domestic
corporation's gross income (excluding certain items) over ``the
deductions (including taxes) properly allocable to such gross income.''
FDDEI is defined as ``any deduction eligible income'' of the taxpayer
generated through foreign-market sales and services. See section
250(b)(4). Therefore, a taxpayer's deductions that are ``properly
allocable'' to gross DEI and gross FDDEI must be determined for
purposes of calculating its DEI and FDDEI. The statute does not specify
how deductions should be allocated for purposes of determining DEI and
FDDEI. However, the rules set forth in Sec. Sec. 1.861-8 through
1.861-14T and 1.861-17 apply for purposes of several other provisions
in the Code which require the determination of taxable income from
specific sources or activities, for example, for purposes of
determining the foreign tax credit limitation under section 904 or
qualified production activities income under former section 199. See
generally Sec. Sec. 1.199-4 and 1.861-8(f)(1). Accordingly, the
proposed regulations provide that the rules set forth in Sec. Sec.
1.861-8 through 1.861-14T and 1.861-17 apply for purposes of
determining DEI and FDDEI. See proposed Sec. 1.250(b)-1(d)(2)(i). In
order to avoid circularity, in applying those rules for purposes of
determining DEI and FDDEI, the section 250 deduction is not treated as
giving rise to exempt income or assets. See proposed Sec. 1.861-
8(d)(2)(ii)(C)(4). Comments are requested on whether alternative
approaches should be considered or additional rules are needed for
purposes of allocating and apportioning a net operating loss deduction
to gross DEI and gross FDDEI.
In certain circumstances, as a result of expense apportionment or
attribution of cost of goods sold, a domestic corporation's FDDEI could
exceed its DEI. For example, a domestic corporation could have $80x of
DEI and $100x of FDDEI, with losses attributable to domestic market
sales accounting for the $20x difference between DEI and FDDEI.
However, it would be inconsistent with the statutory language to treat
a domestic corporation as having a foreign-derived ratio in excess of
one, and therefore FDII in excess of DII. In particular, section
250(b)(4) defines FDDEI as a subset of DEI, that is, ``any deduction
eligible income of such taxpayer which is derived in connection with''
certain transactions. Therefore, the proposed regulations clarify that
the foreign-derived ratio cannot exceed one. See proposed Sec.
1.250(b)-1(c)(13).
3. Treatment of Partnerships
Section 250(a)(1) allows a deduction to a domestic corporation, but
does not provide any rules for domestic corporations that are partners
in a partnership. However, the conference report accompanying the Act
(``Conference Report'') suggests that Congress intended that a domestic
corporate partner of a partnership receive the benefit of a section 250
deduction for its FDII and GILTI. See H. Rept. 115-466, at 623, fn.
1517 (2017) (Conf. Rep.) (``The Committee intends that the deduction
allowed by new Code section 250 be treated as exempting the deducted
income from tax. Thus, for example, the deduction for global intangible
low-taxed income could give rise to an increase in a domestic corporate
partner's basis in a domestic partnership under section
705(a)(1)(B).'').
The proposed regulations give effect to this legislative intent by
adopting an aggregate approach to partnerships for determining a
domestic corporate partner's FDII attributable to the income and assets
of a partnership. Specifically, the proposed regulations provide that a
domestic corporate partner of a partnership takes into account its
distributive share of a partnership's gross DEI, gross FDDEI, and
deductions in order to calculate the partner's FDII. See proposed Sec.
1.250(b)-1(e)(1). In addition, for purposes of determining a domestic
corporate partner's DTIR, a domestic corporation's QBAI is increased by
its share of the partnership's adjusted basis in partnership specified
tangible property. See proposed Sec. 1.250(b)-2(g).
Under the proposed regulations, the section 250 deduction is
computed and allowed solely at the level of a domestic corporate
partner. The Conference Report in footnote 1517 suggests that the
section 250 deduction could give rise to an increase in a domestic
corporate partner's basis in a domestic partnership under section
705(a)(1)(B) because some of the partnership's income may be treated as
exempt income by reason of section 250. However, regardless of whether
the deduction gives rise to exempt income in other contexts, because
the section 250 deduction is computed and allowed solely at the level
of a domestic corporate partner, the section 250 deduction does not
exempt the deducted income from tax for purposes of applying section
705(a)(1)(B). As a result, a basis adjustment to a domestic corporate
partner's interest in a domestic partnership is not appropriate to
account for a section 250 deduction.
4. Treatment of Tax-Exempt Corporations
A domestic corporation that is subject to the unrelated business
income tax under section 511 may claim a section 250 deduction.
However, the proposed regulations clarify that such corporation's FDII
for this purpose is determined only with respect to the corporation's
items of income, gain, deduction, or loss, and adjusted bases in
property, that are taken into account in computing its unrelated
business taxable income. See proposed Sec. 1.250(b)-1(g). The proposed
regulations also clarify how a tax-exempt corporation subject to the
unrelated business income tax under section 511 computes the dual use
ratio with respect to property used in the production of gross DEI and
income that is not gross DEI for purposes of determining its QBAI. See
id.
5. Determination of QBAI
Section 250(b)(2)(B) provides that QBAI for purposes of section 250
is defined under section 951A(d), and is determined by substituting
``deduction eligible income'' for ``tested income'' and without regard
to whether the corporation is a CFC. Accordingly, the determination of
QBAI for purposes of FDII is similar to the determination of QBAI for
purposes of GILTI. Compare proposed Sec. 1.951A-3 with proposed Sec.
1.250(b)-2. A domestic corporation's QBAI for FDII is equal to its
aggregate average adjusted bases in specified tangible property, which
is defined as tangible property used in the production of gross DEI.
See proposed Sec. 1.250(b)-2(b) and (c). The proposed regulations also
provide rules for dual use property, calculating QBAI in a short
taxable year, and calculating a domestic corporate partner's share of
partnership QBAI. See proposed Sec. 1.250(b)-2(d), (f), and (g).
[[Page 8192]]
In order to prevent the avoidance of the purposes of QBAI, the
proposed regulations disregard certain transfers of specified tangible
property by a domestic corporation to a related party where the
corporation continues to use the property in production of gross DEI.
See sections 250(c) and 951A(d)(4). Specifically, for purposes of
calculating a domestic corporation's QBAI, the proposed regulations
disregard a transfer of specified tangible property by the domestic
corporation to a related party (whose QBAI would not be taken into
account in calculating the corporation's DTIR) if, within a two-year
period beginning one year before the transfer, the domestic corporation
(or a related party whose QBAI would be taken into account in
calculating the corporation's DTIR) leases the same or substantially
similar property from a related party and such transfer and lease occur
pursuant to a principal purpose of reducing the domestic corporation's
DTIR. See proposed Sec. 1.250(b)-2(h)(1) and (h)(4)(i) through (iv). A
transfer and lease described in the preceding sentence is treated per
se as occurring pursuant to a principal purpose of reducing a domestic
corporation's DTIR if both the transfer and the lease occur within the
same six-month period. See proposed Sec. 1.250(b)-2(h)(3). If the
anti-avoidance rule applies, the domestic corporation that transferred
the property is treated as owning such property from the later of the
beginning of the term of the lease or date of the transfer until the
earlier of the end of the term of the lease or the end of the recovery
period of the transferred property. See proposed Sec. 1.250(b)-
2(h)(1).
The anti-avoidance rule does not apply to a transfer to and lease
from an unrelated party, unless the transfer to and lease from the
unrelated party is pursuant to a structured arrangement. See proposed
Sec. 1.250(b)-2(h)(2). A structured arrangement exists only if either
a reduction in the domestic corporation's DTIR is a material factor in
the pricing of the arrangement with the transferee or, based on all the
facts and circumstances, the reduction in the domestic corporation's
DTIR is a principal purpose of the arrangement. See id. The proposed
regulations provide a non-inclusive list of facts and circumstances
indicating that a principal purpose of an arrangement is the reduction
of DTIR. See proposed Sec. 1.250(b)-2(h)(2)(ii)(A) through (D). The
Treasury Department and the IRS welcome comments on alternative
approaches to identifying a structured arrangement involving unrelated
parties.
No inference is intended regarding the application of any other
Code section or judicial doctrine that may apply to affect the
determination of FDII and its components.
B. General Rules for FDDEI Transactions
1. Definitions of Sale, Foreign Person, and United States
Proposed Sec. 1.250(b)-3 provides rules relevant to determining
whether a sale of property is a FDDEI sale and whether a provision of a
service is a FDDEI service.
Section 250(b)(5)(E) provides that for purposes of section 250(b),
the term ``sale'' includes any lease, license, exchange, or other
disposition. Accordingly, for purposes of determining whether a sale of
property is a FDDEI sale, the proposed regulations define ``sale'' to
include a lease, license, exchange, or other disposition of property,
including a transfer of property resulting in gain or an income
inclusion under section 367. See proposed Sec. 1.250(b)-3(b)(7).
The proposed regulations define a foreign person as a person that
is not a United States person, which includes a foreign government or
international organization for purposes of the proposed regulations.
See proposed Sec. 1.250(b)-3(b)(2). A United States person (``U.S.
person'') has the same meaning as under section 7701(a)(30), except
that an individual that is a bona fide resident of a U.S. territory
within the meaning of section 937(a) is excluded. See proposed Sec.
1.250(b)-3(b)(10). While corporations formed in U.S. territories are
generally treated as foreign corporations, under section 7701(a)(30),
U.S. persons include all U.S. citizens or residents, regardless of
whether they reside in a U.S. territory. However, a bona fide resident
of a U.S. territory is generally exempt from U.S. tax on income sourced
in that territory. See sections 931(a), 932(c)(4), 933(1), and 935.
Therefore, to prevent the disparate treatment of sales to entities in a
U.S. territory (potentially qualifying as a FDDEI sale) and sales to
individuals in a U.S. territory (not qualifying as a FDDEI sale), the
proposed regulations exclude bona fide residents of a U.S. territory
from the definition of U.S. person.
A partnership is generally a ``person'' for purposes of the Code.
See section 7701(a)(1). Accordingly, in determining whether a sale of
property to or by a partnership qualifies as a FDDEI sale, or the
provision of a service to or by a partnership qualifies as a FDDEI
service, the proposed regulations treat a partnership as a person. See
proposed Sec. 1.250(b)-3(g). Therefore, for example, a sale of
property to a foreign partnership for a foreign use may constitute a
FDDEI sale because such sale is to a foreign person, whereas a sale of
property to a domestic partnership, even if for a foreign use, will not
constitute a FDDEI sale because such sale is to a domestic person. The
Treasury Department and the IRS request comments on whether there are
circumstances where it would be appropriate to treat a partnership as
an aggregate of its partners for purposes of determining whether a sale
of property or a provision of a service to a partnership is a sale or
service to a foreign person.
The proposed regulations provide that the term ``United States''
generally has the meaning described in section 7701(a)(9). See proposed
Sec. 1.250(b)-3(b)(9). However, with respect to mines, oil and gas
wells, and other natural deposits, the term United States includes
certain seabed and subsoil of submarine areas adjacent to the
territorial waters of the United States, as described in section
638(1). See id.
2. Foreign Military Sales
The Treasury Department and the IRS recognize that the statute is
unclear as to whether a sale of property or the provision of a service
to the U.S. government for resale or on-service to a foreign government
under the Arms Export Control Act of 1976, as amended (22 U.S.C. 2751
et seq.), may qualify for the section 250 deduction. In general, the
Arms Export Control Act governs the export of certain sales and
services to foreign governments. Under the Arms Export Control Act, a
seller or service provider provides sales or services to the U.S.
government that are for the ultimate benefit of a foreign government.
The concern is that such sale or service to the U.S. government
governed by the Arms Export Control Act is not a sale to a ``person who
is not a United States person'' within the meaning of section
250(b)(4)(A) or a service to a ``person not located within the United
States'' within the meaning of section 250(b)(4)(B), notwithstanding
that such a sale or service is ultimately provided to the foreign
government.
The proposed regulations provide that, for purposes of section 250,
a sale of property or the provision of a service to the U.S. government
under the Arms Export Control Act of 1976 is treated as a sale of
property or provision of a service to a foreign government. See
proposed Sec. 1.250(b)-3(c). See part I(D)(3) of the Special Analyses
section for additional discussion regarding the analysis for the
adoption of this rule. As
[[Page 8193]]
discussed in part III(B)(1) of this Explanation of Provisions section,
a foreign government or international organization is a foreign person
for purposes of section 250 and the proposed regulations. See proposed
Sec. 1.250(b)-3(b)(2). Therefore, a sale of property or provision of a
service to the U.S. government under the Arms Export Control Act may
qualify as a FDDEI transaction if the other requirements under proposed
Sec. Sec. 1.250(b)-3 through 1.250(b)-6 are satisfied. To the extent
other requirements under proposed Sec. Sec. 1.250(b)-3 through
1.250(b)-6 are not satisfied, a sale or service will not qualify as a
FDDEI transaction regardless of whether such sale or service is
pursuant to the Arms Export Control Act.
The Treasury Department and the IRS have not currently identified
readily available documentation sufficient to demonstrate that a
particular sale or service was made pursuant to the Arms Export Control
Act. Comments are requested on whether final regulations should provide
guidance on how taxpayers can demonstrate that a sale or service has
been made pursuant to the Arms Export Control Act.
3. Knowledge and Reason To Know
As discussed in part III(C) of this Explanation of Provisions
section, the proposed regulations provide that a sale of property
qualifies as a FDDEI sale only if the seller or renderer does not know
or have reason to know that the recipient is not a foreign person or
that the property will not be for a foreign use. See proposed Sec.
1.250(b)-4(c), (d), and (e). In addition, as discussed in part III(D)
of this Explanation of Provisions section, the proposed regulations
provide that the provision of a general service (as defined in proposed
Sec. 1.250(b)-5(c)(4)) qualifies as a FDDEI service only if the
renderer of the service does not know or have reason to know that the
recipient is located within the United States. See proposed Sec.
1.250(b)-5(d)(1) and (e)(1). The terms ``know'' and ``reason to know''
are used throughout the Code and Treasury regulations. The Treasury
Department and the IRS request comments regarding whether definitions
of ``know'' and ``reason to know'' are necessary for purposes of the
section 250 regulations.
4. Reliability of Documentation
In order for a transaction to constitute a FDDEI transaction, the
proposed regulations prescribe different types of documentation that
are required to be obtained for each type of transaction. For example,
in the case of a sale of property, the seller must obtain documentation
that establishes the recipient's status as a foreign person. See
proposed Sec. 1.250(b)-4(c)(2). See parts III(C) and III(D) of this
Explanation of Provisions section for an explanation of the
documentation requirements in these proposed regulations; see also part
II of the Special Analyses section for a discussion of the Paperwork
Reduction Act.
The proposed regulations provide that, for any documentation
described in the proposed regulations to be relied upon, the seller or
renderer must obtain the documentation by the FDII filing date, the
documentation must be obtained no earlier than one year before the sale
or service, and the seller or renderer must not know or have reason to
know that the documentation is incorrect or unreliable. See proposed
Sec. 1.250(b)-3(d); see also proposed Sec. 1.250(b)-3(b)(1) (defining
the term ``FDII filing date''). For this purpose, a seller or renderer
has reason to know that documentation is unreliable or incorrect if its
knowledge of all the relevant facts or statements contained in the
documentation is such that a reasonably prudent person in the position
of the seller or renderer would question the accuracy of the
documentation. See proposed Sec. 1.250(b)-3(d)(1).
The Treasury Department and the IRS welcome comments on the
documentation requirements in the proposed regulations.
5. Transactions Consisting of Both Sales and Services
Under section 250(b)(4) and (5) and these proposed regulations, the
criteria for establishing that a transaction is foreign-derived is
different for sales and services. For example, a transaction with a
U.S. person that is located outside of the United States may qualify as
a FDDEI service, but cannot qualify as a FDDEI sale. Because a
transaction might include elements of both a sale and a service, the
proposed regulations clarify that a transaction is classified according
to the overall predominant character of the transaction. See proposed
Sec. 1.250(b)-3(e). For example, a sale of equipment that includes
incidental support services from the seller at no additional cost would
be classified as a sale, and therefore the provisions of proposed Sec.
1.250(b)-4 would apply to determine whether gross income from the
transaction is included in gross FDDEI.
6. Special Rule for Certain Loss Transactions
A domestic corporation's FDDEI includes all gross income included
in gross DEI that is derived from FDDEI sales and FDDEI services in a
taxable year, reduced by the amount of deductions properly allocable to
such income. See proposed Sec. 1.250(b)-1(c)(12) and part III(A)(2) of
this Explanation of Provisions section. In most cases, a FDDEI sale or
FDDEI service will increase a domestic corporation's section 250
deduction, because the income from such sale or service will increase
the corporation's FDDEI and thus its foreign-derived ratio. However, in
some cases, a FDDEI sale or a FDDEI service could have the effect of
reducing FDDEI and thus a domestic corporation's section 250 deduction
for the year. This could happen where, for instance, the domestic
corporation's cost of goods sold attributed to property sold in a FDDEI
sale exceeds its gross receipts from the sale, or the expenses
allocated to the gross income from a FDDEI sale or FDDEI service exceed
the gross income arising from the sale or service. In such a case,
absent a rule to the contrary, a domestic corporation could
intentionally fail to satisfy the documentation requirements with
respect to a transaction that would otherwise qualify as a FDDEI sale
or FDDEI service in order to prevent the transaction from reducing its
FDDEI and thereby its section 250 deduction.
Section 250(b) does not contemplate a transaction-by-transaction
determination of FDII, but rather an aggregate calculation based on all
gross income ``which is derived in connection with'' sales and services
described in section 250(b)(4). Therefore, it would be inappropriate to
permit taxpayers to elect to exclude losses related to sales to foreign
persons for a foreign use and services to persons located outside the
United States by merely failing the documentation requirements.
Accordingly, the proposed regulations provide that if a seller or
renderer knows or has reason to know that property is sold to a foreign
person for a foreign use or a general service is provided to a person
located outside the United States, but the seller or renderer does not
satisfy the documentation requirements applicable to such sale or
service, the sale of property or provision of a service is nonetheless
deemed a FDDEI transaction if treating the sale or service as a FDDEI
transaction would reduce a domestic corporation's FDDEI. See proposed
Sec. 1.250(b)-3(f).
The special loss transaction rule in proposed Sec. 1.250(b)-3(f)
does not apply to proximate services, property services, and
transportation services, each of which is defined and discussed in part
III(D)(3) through (5) of this Explanation of Provisions section,
because the
[[Page 8194]]
proposed regulations do not require documentation with respect to such
services. Therefore, a proximate service, property service, or
transportation service is a FDDEI service if it meets the applicable
substantive requirements for a FDDEI service described in Sec.
1.250(b)-5(f), (g), and (h), respectively.
C. FDDEI Sales
1. In General
Section 250(b)(4)(A) provides that FDDEI includes income from
property the taxpayer sells to any person who is not a U.S. person, and
which the taxpayer establishes to the satisfaction of the Secretary is
for a foreign use. Accordingly, the proposed regulations define a FDDEI
sale as a sale of property to a foreign person for a foreign use. See
proposed Sec. 1.250(b)-4(b).
2. Foreign Person
The proposed regulations provide that a recipient is treated as a
foreign person only if the seller obtains documentation of the
recipient's foreign status and does not know or have reason to know
that the recipient is not a foreign person. See proposed Sec.
1.250(b)-4(c)(1). The proposed regulations provide several types of
permissible documentation for this purpose, such as a written statement
by the recipient indicating that the recipient is a foreign person. See
proposed Sec. 1.250(b)-4(c)(2)(i). To alleviate the burden of
documentation on small businesses and small transactions, the proposed
regulations allow a seller that has less than $10,000,000 of gross
receipts in the prior taxable year, or less than $5,000 in gross
receipts from a single recipient during the current taxable year, to
treat a recipient as a foreign person if the seller has a shipping
address for the recipient that is outside the United States. See
proposed Sec. 1.250(b)-4(c)(2)(ii). The $10,000,000 and $5,000
thresholds were chosen based on the experience of the Treasury
Department and the IRS and not based on any specific quantitative
analysis. The Treasury Department and the IRS request comments
regarding whether the $10,000,000 and $5,000 thresholds are appropriate
and especially solicit comments that provide data, other evidence, and
models that can enhance the rigor of the process by which such
thresholds are determined.
3. Foreign Use
Under the proposed regulations, the rules applicable to the
determination of whether a sale of property is for a foreign use
depends on whether the property sold is ``general property'' or
``intangible property.'' See proposed Sec. 1.250(b)-4(d) and (e). The
proposed regulations define general property as property other than
intangible property, a security (as defined in section 475(c)(2)), or a
commodity (as defined in section 475(e)(2)(B) through (D)). See
proposed Sec. 1.250(b)-3(b)(3). The proposed regulations define
intangible property by cross-reference to section 367(d)(4). See
proposed Sec. 1.250(b)-3(b)(4).
The proposed regulations provide that a sale of a security (as
defined in section 475(c)(2)) or a commodity (as defined in section
475(e)(2)(B) through (D)) is not a FDDEI sale because such financial
instruments are not subject to ``any use, consumption, or disposition''
outside the United States within the meaning of section 250(b)(5)(A).
See proposed Sec. 1.250(b)-4(f).
The proposed regulations provide that a sale of property (whether
general property or intangible property) is treated as for a foreign
use only if the seller obtains documentation that the property is for a
foreign use and does not know or have reason to know, as of the FDII
filing date, that the property is not for a foreign use (or, in the
case of intangible property, that the portion of the sale of the
intangible property for which the seller establishes foreign use is not
for a foreign use). See proposed Sec. 1.250(b)-4(d)(1) and (e)(1).
Accordingly, if, as of the FDII filing date, the seller does not know
or have reason to know that either the documentation obtained with
respect to the sale is not reliable or that the property is not for a
foreign use within the meaning of Sec. 1.250(b)-4(d)(2) or (e)(2),
then the sale of the property is treated as for a foreign use under
Sec. 1.250(b)-4(d)(1) or (e)(1) even if, in fact, the sale of such
property is not for a foreign use within the meaning of Sec. 1.250(b)-
4(d)(2) or (e)(2).
a. Foreign Use for General Property
The sale of general property is for a foreign use if either the
property is not subject to domestic use within three years of delivery
of the property or the property is subject to manufacture, assembly, or
other processing outside the United States before any domestic use of
the property. See proposed Sec. 1.250(b)-4(d)(2)(i) and Conf. Rep. at
625, fn. 1522 (``If property is sold by a taxpayer to a person who is
not a U.S. person, and after such sale the property is subject to
manufacture, assembly, or other processing (including the incorporation
of such property, as a component, into a second product by means of
production, manufacture, or assembly) outside the United States by such
person, then the property is for a foreign use.''). Domestic use is
defined as the use, consumption, or disposition of property within the
United States, including manufacture, assembly, or other processing
within the United States. See proposed Sec. 1.250(b)-4(d)(2)(ii).
Comments are requested on the supply chain implications of these rules.
General property is subject to manufacturing, assembly, or other
processing only if it meets either of the following two tests: (1)
There is a physical and material change to the property, or (2) the
property is incorporated as a component into a second product. See
proposed Sec. 1.250(b)-4(d)(2)(iii)(A). The proposed regulations
clarify that a physical and material change does not include ``minor
assembly, packaging, or labeling.'' See proposed Sec. 1.250(b)-
4(d)(2)(iii)(B). However, whether property has undergone a physical and
material change (as opposed to minor assembly, packaging, or labeling)
is determined based on all the relevant facts and circumstances. The
Treasury Department and the IRS request comments regarding whether
additional guidance should be provided for determining whether property
has undergone a physical and material change.
General property is incorporated as a component into a second
product only if the fair market value of the property when it is
delivered to the recipient constitutes no more than 20 percent of the
fair market value of the second product, determined when the second
product is completed. See proposed Sec. 1.250(b)-4(d)(2)(iii)(C). If
the seller sells multiple items of property that are incorporated into
the second product, an aggregation rule treats all of the property sold
by the seller that is incorporated into the second product as a single
item of property for purposes of determining whether the property
constitutes more than 20 percent of the fair market value of the second
product. See id.
In order to establish that general property is for a foreign use,
the seller must generally obtain documentation with respect to the
sale. See proposed Sec. 1.250(b)-4(d)(3). Such documentation could
include, for example, proof of shipment of the property to a foreign
address. See proposed Sec. 1.250(b)-4(d)(3)(i). However, in the case
of certain small businesses and small transactions, the seller may rely
on a foreign shipping address for the recipient instead of obtaining
documentation. See proposed Sec. 1.250(b)-4(d)(3)(ii).
[[Page 8195]]
In lieu of the general documentation requirements for determining
foreign use for sales of general property, in the case of a sale of
multiple items of general property, which because of their fungible
nature cannot reasonably be specifically traced to the location of use
(``fungible mass''), a seller may establish that some, but not all, of
the property is for a foreign use through market research, including
statistical sampling, economic modeling, and other similar methods. See
proposed Sec. 1.250(b)-4(d)(3)(iii). A de minimis rule applies to
treat the entire fungible mass as for a foreign use if a seller obtains
documentation establishing that 90 percent or more of the fungible mass
is for a foreign use. See id. Conversely, no portion of the fungible
mass is treated as for a foreign use if the seller does not obtain
documentation establishing that 10 percent or more of the fungible mass
is for a foreign use. Id.
A special rule applies for purposes of determining whether the sale
of certain transportation property is for a foreign use, which takes
into account the special nature of property used for international
transportation. Specifically, the sale of aircraft, railroad rolling
stock, vessel, motor vehicle, or similar property that provides a mode
of transportation and is capable of traveling internationally is for a
foreign use only if, during the three-year period from the date of
delivery of the property, the property is located outside the United
States more than 50 percent of the time and more than 50 percent of the
miles traversed in the use of such property will be traversed outside
the United States. See proposed Sec. 1.250(b)-4(d)(2)(iv). The seller
can establish that a sale of general property used for international
transportation is for a foreign use through, for example, a written
statement from the recipient that the property is anticipated to
satisfy the test described in the preceding sentence. See proposed
Sec. 1.250(b)-4(d)(3)(i)(A).
b. Foreign Use for Intangible Property
As discussed in part III(B) of this Explanation of Provisions
section, a sale includes a license and any transfer of property in
which gain or income is recognized under section 367, including a
transfer of intangible property subject to section 367(d). See proposed
Sec. 1.250(b)-3(b)(7). The proposed regulations provide that a sale of
intangible property is for a foreign use to the extent revenue is
earned from exploiting the intangible property outside the United
States, the documentation requirements are satisfied, and the seller
does not know or have reason to know that the portion of the sale of
the intangible property for which the seller establishes foreign use is
not for a foreign use. See proposed Sec. 1.250(b)-4(e)(1). Unlike a
sale of general property (other than a sale of a fungible mass), a
seller may establish foreign use for a portion of the income from the
sale of intangible property. For purposes of determining whether a sale
of intangible property is for a foreign use, the location where revenue
is earned is generally determined based on the location of end-user
customers licensing the intangible property or purchasing products for
which the intangible property was used in development, manufacture,
sale, or distribution. See proposed Sec. 1.250(b)-4(e)(2). This
determination is generally made on an annual basis based on the actual
revenue earned by the recipient. Id.
Special rules apply to lump sum sales because, in these cases, it
may be difficult or impossible to know the location where revenue will
be generated when the sale occurs. The determination of foreign use in
these cases is made based on the net present value of revenue the
seller would have reasonably expected to earn from the exploitation of
the intangible property. See proposed Sec. 1.250(b)-4(e)(2)(iii). For
sales of rights to intangible property for use both within and outside
the United States, the seller must establish the proportionate amount
of revenue earned within and outside the United States from use of the
intangible property to establish foreign use. The proposed regulations
describe documentation that can be used to establish where revenue is
earned from use of the intangible property. See proposed Sec.
1.250(b)-4(e)(3)(i). For example, if a domestic corporation licenses to
a foreign person the worldwide rights to market and sell an item
protected by a copyright, the domestic corporation would need to obtain
documentation, as provided in the proposed regulations, establishing
where revenue is earned from sales of the copyright-protected item.
A seller may establish the extent to which a sale of intangible
property for a lump sum is for a foreign use through documentation
containing reasonable projections of the amount and location of revenue
that the seller would have reasonably expected to earn from the use of
intangible property. See proposed Sec. 1.250(b)-4(e)(3)(iii). To be
considered reasonable, the net present value must be consistent with
the financial data and projections used by the seller to determine the
sales price to the foreign person. See id. The same rule for
documentation applies to a sale to a foreign person (other than a
related party of the seller) for annual payments that are not
contingent on revenue or profit unless the seller has access to
reliable information to determine the actual revenue earned by the
foreign unrelated party from the exploitation of the intangible
property. See proposed Sec. 1.250(b)-4(e)(3)(ii).
As discussed in part III(C)(3)(a) of this Explanation of Provisions
section, a sale of general property is treated as for a foreign use if
the property is subject to manufacturing, assembly, or other processing
outside the United States. See proposed Sec. 1.250(b)-4(d)(2)(i)(B).
This rule is based on footnote 1522 of the Conference Report, which
provides that ``[i]f property is sold by a taxpayer to a person who is
not a U.S. person, and after such sale the property is subject to
manufacture, assembly, or other processing (including the incorporation
of such property, as a component, into a second product by means of
production, manufacture, or assembly) outside the United States by such
person, then the property is for a foreign use.'' Intangible property
is not ``subject to'' manufacture, assembly, or processing, and there
is no other discussion in the Conference Report that indicates an
intent to provide an analogous rule for intangible property otherwise
used in the manufacturing process. However, comments are requested on
whether a rule for intangible property similar to proposed Sec.
1.250(b)-4(d)(2)(i)(B) is appropriate. Comments are also requested on
what additional rules may be needed for determining the location of
revenue generation from end-users and what types of documentation
should be accepted to document the location of revenue generation with
respect to intangible property.
D. FDDEI Services
1. In General
Section 250(b)(4)(B) provides that FDDEI includes income from
services provided by a domestic corporation to any person, or with
respect to property, not located within the United States. Section 250
does not prescribe rules for determining whether a person or property
is ``not located within the United States.'' Proposed Sec. 1.250(b)-5
provides rules for determining whether a service is provided to a
person, or with respect to property, located outside the United States.
Under the proposed regulations, whether a service is provided to a
person, or with respect to property, located outside the United States,
depends on the type of service provided and, in the case of a general
service
[[Page 8196]]
(defined below), the type of recipient of the service. The proposed
regulations distinguish between services where the service provider
(the ``renderer'') and the recipient are in physical proximity when the
service is performed (``proximate services''), services with respect to
tangible property (``property services''), services to transport people
or property (``transportation services''), and all other services
(``general services''). See proposed Sec. 1.250(b)-5(b) and (c)(4)
through (7). For purposes of determining whether a service constitutes
a FDDEI service, the proposed regulations look to the location of the
performance of the service for proximate services, the location of the
property for property services, the origin and destination of
transportation services, and the location of the recipient for general
services. See proposed Sec. 1.250(b)-5(d) through (h).
Each category of service described in Sec. 1.250(b)-5 is mutually
exclusive of each other category, and every possible service is
described in a single category. Therefore, whether a service is a FDDEI
service is determined under the rules relevant to one, and only one,
category of service described in Sec. 1.250(b)-5. For example, a
general service that is provided to a recipient located within the
United States is not a FDDEI service, even if the service is performed
outside the United States, whereas a property service that is performed
outside the United States is a FDDEI service, even if the recipient of
the service is located within the United States. See parts III(D)(2)
and (4) of this Explanation of Provisions section.
2. General Services to Persons Located Outside the United States
A general service is a service other than a proximate service, a
property service, or a transportation service. See proposed Sec.
1.250(b)-5(c)(4). General services is the residual category of
services. Accordingly, a service that is not a property service, a
transportation service, or a proximate service is analyzed as a general
service.
For general services, the proposed regulations distinguish between
services provided to ``consumers'' and services provided to ``business
recipients.'' A consumer is defined as an individual that purchases a
service for personal consumption. See proposed Sec. 1.250(b)-5(c)(3).
A business recipient is defined as any recipient other than a consumer.
See proposed Sec. 1.250(b)-5(c)(2). In both cases, general services
are treated as provided to a person located outside the United States
if the renderer does not know or have reason to know that the consumer
or business recipient is located within the United States and obtains
appropriate documentation. See proposed Sec. 1.250(b)-5(d)(1) and
(e)(1).
a. General Services to Consumers
The provision of a general service to a consumer located outside
the United States is a FDDEI service. See proposed Sec. 1.250(b)-
5(b)(1). The proposed regulations provide that the consumer is located
where a consumer resides when the service is provided. See proposed
Sec. 1.250(b)-5(d)(2).
The proposed regulations require a domestic corporation to document
the location of the consumer. See proposed Sec. 1.250(b)-5(d)(1) and
(3). The proposed regulations provide several types of permissible
documentation for this purpose, including a written statement by the
consumer indicating the residence of the consumer when the service is
provided. See proposed Sec. 1.250(b)-5(d)(3)(i). However, in the case
of certain small businesses and small transactions, the renderer may
rely on a foreign billing address for the consumer instead of obtaining
documentation. See proposed Sec. 1.250(b)-5(d)(3)(ii).
b. General Services to Business Recipients
The provision of a general service to a business recipient located
outside the United States is a FDDEI service. See proposed Sec.
1.250(b)-5(b)(2). Under the proposed regulations, all general services
that are not provided to consumers are treated as services provided to
business recipients, regardless of whether the recipient is engaged in
a trade or business. See proposed Sec. 1.250(b)-5(c)(2).
The proposed regulations determine the location of a business
recipient based on the location of the business recipient's operations,
and the operations of any related party of the recipient, that receive
a benefit (as defined in Sec. 1.482-9(l)(3)) from such service. See
proposed Sec. 1.250(b)-5(e)(2) and (4). For purposes of this
determination, the location of residence, incorporation, or formation
of a business recipient is not relevant. For example, a general service
that confers a benefit only on the U.S. operations of a foreign person
will generally not qualify as a FDDEI service, whereas a service that
confers a benefit only on the foreign operations of a U.S. person will
generally qualify as a FDDEI service. For purposes of this rule, a
business recipient is treated as having operations in any location
where it maintains an office or other fixed place of business. See
proposed Sec. 1.250(b)-5(e)(2)(ii).
The proposed regulations provide that a service is generally
provided to a business recipient located outside the United States to
the extent that the renderer's gross income from providing the service
is allocated to the business recipient's operations outside the United
States. See proposed Sec. 1.250(b)-5(e)(2)(i). To make this
allocation, the renderer must first determine which of the business
recipient's operations receive a benefit from the service. See proposed
Sec. 1.250(b)-5(e)(2)(i)(A). Where the service confers a benefit on
the operations of the business recipient in specific locations, gross
income of the renderer is allocated based on the location of the
operations in specific locations that receive the benefit. See id.
Where a service confers a benefit on the recipient's business as a
whole, or where reliable information about the particular portion of
the operations that specifically receive a benefit from the service is
unavailable, the proposed regulations provide that the service is
deemed to confer a benefit on all of the business recipient's
operations. See id. The renderer then must allocate its gross income
from providing the service between the operations that receive a
benefit from the service that are located within and outside the United
States. See proposed Sec. 1.250(b)-5(e)(2)(i)(B). For this purpose,
any reasonable method may be used, and the principles of Sec. 1.482-
9(k) apply to determine whether a method is reasonable. See id. A
reasonable method may include, for example, an allocation based on the
renderer's time spent working with different offices of the business
recipient or publicly available information about the business
recipient's revenue from different markets. See id. The Treasury
Department and the IRS request comments on this approach for
determining the location of a business recipient that operates both
within and outside of the United States.
The proposed regulations also require a domestic corporation to
obtain documentation sufficient to establish the location of a business
recipient's operations that benefit from the service. See proposed
Sec. 1.250(b)-5(e)(1) and (3). A domestic corporation may obtain a
statement from the recipient specifying the location of the operations
that will benefit from the service or include a similar statement in a
binding contract. See proposed Sec. 1.250(b)-5(e)(3)(i)(A) and (B). A
domestic corporation may also establish the location of the business
recipient using information provided in the ordinary course of the
provision of a service or publicly
[[Page 8197]]
available information. See proposed Sec. 1.250(b)-5(e)(3)(i)(C) and
(D). However, in the case of certain small businesses and small
transactions, the renderer may rely on a foreign billing address for
the business recipient instead of obtaining documentation. See proposed
Sec. 1.250(b)-5(e)(3)(ii).
3. Proximate Services
The provision of a proximate service to a recipient located outside
the United States is a FDDEI service. See proposed Sec. 1.250(b)-
5(b)(3). A proximate service is defined as a service, other than a
property service or a transportation service, substantially all of
which is performed in the physical presence of the recipient or, in the
case of a business recipient, its employees. See proposed Sec.
1.250(b)-5(c)(6). For example, a training, consulting, or auditing
service that is performed on-site would generally constitute a
proximate service. Substantially all of a service is performed in the
physical presence of the recipient or its employees if the renderer
spends more than 80 percent of the time providing the service in the
physical presence of the recipient or its employees. See proposed Sec.
1.250(b)-5(c)(6). The recipient of a proximate service is treated as
located where the service is performed. See proposed Sec. 1.250(b)-
5(f). If a proximate service is performed partly within and partly
outside the United States, a proportionate amount of the service is
treated as rendered to a person located outside the United States
corresponding to the portion of time spent providing the proximate
service outside the United States. See id.
4. Property Services
The provision of a property service with respect to tangible
property located outside the United States is a FDDEI service. See
proposed Sec. 1.250(b)-5(b)(4). A property service is defined as a
service, other than a transportation service, provided with respect to
tangible property, but only if substantially all of the service is
performed at the location of the property and results in physical
manipulation of the property such as through assembly, maintenance, or
repair. See proposed Sec. 1.250(b)-5(c)(5). The proposed regulations
provide that substantially all of a service is performed at the
location of property if the renderer spends more than 80 percent of the
time providing the service at or near the location of the property. See
id. A property service is a FDDEI service only if the tangible property
with respect to which the service is performed is located outside the
United States for the duration of the period of performance. See
proposed Sec. 1.250(b)-5(g). The Treasury Department and the IRS
request comments on whether to consider an exception for property that
is located in the United States temporarily solely for purposes of the
performance of certain services, such as maintenance or repairs. As
discussed in part III(E) of this Explanation of Provisions section, a
property service may qualify as a FDDEI service even if it is performed
for a person located within the United States.
Other services that relate to property but may not necessarily be
provided in close proximity to tangible property or do not result in
the physical manipulation of such property such as through assembly,
maintenance, or repair may be subject to the rules for proximate
services, transportation services, or general services. For example, an
architectural or engineering service that is not performed in physical
proximity to the property or the recipient will be evaluated as a
general service even if the service relates to property located outside
the United States, and thus whether such a service is a FDDEI service
will be determined based on the location of the recipient rather than
the location of the property.
5. Transportation Services
The provision of a transportation service to a recipient, or with
respect to property, located outside the United States is a FDDEI
service. See proposed Sec. 1.250(b)-5(b)(5). A transportation service
is defined as a service to transport a person or property using any
mode of transportation (such as an airplane). See proposed Sec.
1.250(b)-5(c)(7).
Basing the location of a transportation service on the residence of
the recipient of the transportation service could provide inconsistent
results with respect to similar services. Similarly, providing
different rules for the transportation of a person or property could
provide inconsistent results with respect to similar services.
Therefore, the proposed regulations provide that whether a
``transportation service'' is provided to a recipient, or with respect
to property, located outside the United States is determined based on
the origin and destination of the service. See proposed Sec. 1.250(b)-
5(h). If both the origin and destination of a transportation service
are outside of the United States, then the service is a FDDEI service.
See id. If either the origin or the destination of the transportation
service is outside of the United States, but not both, then 50 percent
of the service is a FDDEI service and thus 50 percent of the gross
income from the provision of the service is included in the renderer's
gross FDDEI. See id.
E. Domestic Intermediary Rules
Section 250(b)(5)(B) describes special rules for ``domestic
intermediaries'' (the ``domestic intermediary rules''). Section
250(b)(5)(B)(i) provides that if a seller sells property to another
person (other than a related party) for further manufacture or other
modification within the United States, the property is not treated as
sold for a foreign use even if such other person subsequently uses such
property for a foreign use. Section 250(b)(5)(B)(ii) provides that
services provided to a person (other than a related party) located
within the United States are not treated as services described in
section 250(b)(4)(B) even if such other person uses such services in
providing services that are described in section 250(b)(4)(B).
The proposed regulations do not contain specific rules
corresponding to the domestic intermediary rules because those rules
are encompassed within the general rules relating to FDDEI sales and
FDDEI services in the proposed regulations. With respect to sales of
property, the proposed regulations provide that general property is not
for a foreign use if, before being subject to manufacture, assembly, or
other processing outside the United States, the property is subject to
a domestic use. See proposed Sec. 1.250(b)-4(d)(2)(i). For this
purpose, domestic use includes manufacture, assembly, or other
processing within the United States. See proposed Sec. 1.250(b)-
4(d)(2)(ii)(B). In addition, a sale of property to a U.S. person cannot
qualify as a FDDEI sale under any circumstance. See section
250(b)(4)(A) and proposed Sec. 1.250(b)-4(b). Therefore, a sale of
property to a foreign person for further manufacture in the United
States or to a U.S. person does not qualify for a FDDEI sale,
regardless of the ultimate use of the property by the recipient.
With respect to the provision of services, the proposed regulations
provide that a service is a FDDEI service only if the recipient of the
service, or the property to which the service relates, is located
outside the United States. See proposed Sec. 1.250(b)-5(b)(1) through
(5). Therefore, a service provided to a person, or with respect to
property, located within the United States is not a FDDEI service,
regardless of the ultimate use of the service by the recipient.
Section 250(b)(5)(B)(ii) could be read literally to provide that a
FDDEI service includes only services provided to a
[[Page 8198]]
person not located within the United States, in which case a service
provided ``with respect to property located outside the United States''
would not qualify as a FDDEI service if the recipient of such service
was located within the United States. As discussed in part III(D) of
this Explanation of Provisions section, consistent with the general
rule of section 250(b)(4)(B), the proposed regulations clarify that a
service qualifies as a FDDEI service if it is provided either to a
person located outside the United States or with respect to property
located outside the United States. The Treasury Department and the IRS
have determined that an interpretation of section 250(b)(5)(B)(ii) that
effectively eliminates the disjunctive test of section 250(b)(4)(B)
would not be reasonable. Therefore, under the proposed regulations,
whether a service that is treated as with respect to property--a
property service or a transportation service--is a FDDEI service is
determined solely by reference to the location of the property, and not
the location of the recipient. See proposed Sec. 1.250(b)-5(g) and
(h).
Finally, the parenthetical references to related parties in the
domestic intermediary rules could be read to imply the existence of an
exception for further manufacture or modification in the United States
by a related party or a service provided to a related party located
within the United States. However, the general rules of section
250(b)(4)(A) and (B) do not authorize such exceptions, and the domestic
intermediary rules do not purport to expand these general rules, but
rather to limit the transactions that qualify under them. Therefore,
with respect to related party domestic intermediaries, the proposed
regulations do not provide an exception to the general rule that
property must be sold to a foreign person to qualify as a FDDEI sale or
that a service must be provided to a person located outside the United
States to qualify as a FDDEI service. Cf. part V of this Explanation of
Provisions section regarding the applicability of the attribute
redetermination rule of Sec. 1.1502-13(c)(1)(i) to the determination
of FDDEI of a member of a consolidated group.
F. Related Party Transactions
A sale of property or a provision of a service may qualify as a
FDDEI transaction, regardless of whether the recipient of such service
is a related party of the seller or renderer. However, in the case of a
sale of general property or a provision of a general service to a
related party, section 250(b)(5)(C) and proposed Sec. 1.250(b)-6
provide additional requirements that must be satisfied for the
transaction to qualify as a FDDEI sale or FDDEI service. These
requirements must be satisfied in addition to the general requirements
that apply to such sales and services as provided in proposed
Sec. Sec. 1.250(b)-3 through 1.250(b)-5.
The proposed regulations define a related party with respect to any
person as any member of a modified affiliated group that includes such
person. Proposed Sec. 1.250(b)-1(c)(19). A modified affiliated group
is defined as an affiliated group as provided in section 1504(a) by
substituting ``more than 50 percent'' for ``at least 80 percent'' each
place it appears, and without regard to section 1504(b)(2) and (3).
Proposed Sec. 1.250(b)-1(c)(17)(i). A modified affiliated group also
includes any person other than a corporation that is controlled by one
or more members of a modified affiliated group or that controls such a
member. Proposed Sec. 1.250(b)-1(c)(17)(ii). For this purpose,
``control'' is defined as provided in section 954(d)(3), meaning
direct, indirect, or constructive ownership under section 958 of more
than 50 percent of the value of the beneficial interests in such
person. Proposed Sec. 1.250(b)-1(c)(17)(iii).
1. Related Party Sales
Section 250(b)(5)(C)(i) provides that property sold to a related
party that is not a U.S. person ``shall not be treated as for a foreign
use unless (I) such property is ultimately sold by a related party, or
used by a related party in connection with property which is sold or
the provision of services, to another person who is an unrelated party
who is not a United States person, and (II) the taxpayer establishes to
the satisfaction of the Secretary that such property is for a foreign
use.'' Accordingly, the proposed regulations provide that a sale of
general property to a foreign related party (a ``related party sale'')
qualifies as a FDDEI sale only if certain additional requirements
described in Sec. 1.250(b)-6(c)(1)(i) or (ii) are satisfied. See
proposed Sec. 1.250(b)-6(c)(1).
If a foreign related party resells the purchased property (such as
where the foreign related party is a distributor or a manufacturer of a
product that incorporates the purchased property as a component), the
sale to the foreign related party qualifies as a FDDEI sale only if an
unrelated party transaction with respect to such sale occurs and the
unrelated party transaction is a FDDEI sale. An unrelated party
transaction is generally a transaction between the foreign related
party and an unrelated foreign person in which the property purchased
by the foreign related party is sold or used. See proposed Sec.
1.250(b)-6(b)(5). For purposes of this rule, whether property is a
component of another property that is subsequently sold in an unrelated
party transaction is determined without regard to the rule defining a
``component'' for purposes of determining whether general property is
subject to manufacturing, assembly, or other processing, as described
in part III(C)(3)(a) of this Explanation of Provisions section. The
unrelated party sale generally must occur on or before the FDII filing
date; otherwise the gross income from the related party sale is
included in the domestic corporation's gross DEI for the taxable year
of the related party sale, but is not included in its gross FDDEI. See
proposed Sec. 1.250(b)-6(c)(1)(i). However, if an unrelated party
transaction occurs after the FDII filing date but within the period of
limitations provided by section 6511, the proposed regulations provide
that the domestic corporation may file an amended return for the
taxable year in which the related party sale occurred claiming the
related party sale as a FDDEI sale for purposes of determining the
taxpayer's foreign-derived intangible income for that taxable year,
provided that the sale otherwise meets the requirements in proposed
Sec. 1.250(b)-6(c)(1)(i). See id. The Treasury Department and the IRS
welcome comments on whether alternatives should be considered in lieu
of requiring the filing of an amended return.
For transactions other than the resale of purchased property, such
as where the foreign related party uses the purchased property to
produce other property that is sold in unrelated party transactions, or
where the foreign related party uses the property in the provision of a
service in an unrelated party transaction, the sale of property does
not qualify as a FDDEI sale unless, as of the FDII filing date, the
seller reasonably expects that more than 80 percent of the revenue
earned by the foreign related party from the use of the property in all
transactions will be earned from unrelated party transactions that are
FDDEI transactions (determined without regard to the documentation
requirements in Sec. 1.250(b)-4 or Sec. 1.250(b)-5). See proposed
Sec. 1.250(b)-6(c)(1)(ii).
The rules applicable to related party sales apply only to determine
whether sales of general property qualify as a FDDEI sale. See proposed
Sec. 1.250(b)-6(c)(1). Sales of intangible property, whether to a
related or an unrelated party, are for a foreign use only to the
[[Page 8199]]
extent that the intangible property generated revenue from exploitation
outside the United States. See proposed Sec. 1.250(b)-4(e)(2) and part
III(C)(3)(b) of this Explanation of Provisions section. Thus,
additional rules with respect to related party sales of intangible
property are unnecessary to ensure that such sales are ultimately for a
foreign use.
2. Related Party Services
Section 250(b)(5)(C)(ii) provides that a service provided to a
related party not located in the United States ``shall not be treated
[as a FDDEI service] unless the taxpayer establishe[s] to the
satisfaction of the Secretary that such service is not substantially
similar to services provided by such related party to persons located
within the United States.'' Accordingly, the proposed regulations
generally provide that a provision of a general service to a business
recipient that is a related party qualifies as a FDDEI service only if
the service is not substantially similar to a service provided by the
related party to persons located within the United States. See proposed
Sec. 1.250(b)-6(d)(1).
Absent section 250(b)(5)(C)(ii) and proposed Sec. 1.250(b)-6(d)(1)
(the ``related party services rule''), a domestic corporation could
generate gross FDDEI from the provision of services that primarily
benefit persons within the United States by using a related party
located outside the United States as a conduit. The related party
services rule prevents taxpayers from claiming gross FDDEI derived from
such ``round tripping'' arrangements. In contrast, proximate services,
property services, and transportation services by their nature present
minimal risk for ``round tripping,'' because the location of the
recipient or property, as applicable, for purposes of such services is
generally determined based on the place of performance. See proposed
Sec. 1.250(b)-5(f), (g), and (h), and parts III(D)(3), (4), and (5) of
this Explanation of Provisions section. Further, a general service
provided to a consumer that is a related party cannot be substantially
similar to a service provided by a consumer to a person located within
the United States, because a consumer, by definition, is an individual
that purchases the service for personal use. See proposed Sec.
1.250(b)-5(c)(3). Accordingly, the proposed regulations provide that
the related party services rule applies only to determine whether a
general service provided to a business recipient that is a related
party is a FDDEI service. See proposed Sec. 1.250(b)-6(d)(1).
A service provided by a renderer to a related party is
``substantially similar'' to a service provided by the related party to
a person located within the United States if the renderer's service (or
``related party service'') is used by the related party to provide a
service to a person located within the United States and either the
``benefit test'' of proposed Sec. 1.250(b)-6(d)(2)(i) or the ``price
test'' of proposed Sec. 1.250(b)-6(d)(2)(ii) is satisfied. The rules
to determine the location of a recipient of a service provided by a
related party are generally the same as the rules for determining the
location of a recipient of a service provided by the renderer.
The benefit test is satisfied if 60 percent or more of the benefits
conferred by the related party service are to persons located within
the United States. See proposed Sec. 1.250(b)-6(d)(2)(i). For this
purpose, the term ``benefit'' has the meaning provided in Sec. 1.482-
9(l)(3). See proposed Sec. 1.250(b)-5(c)(1). Therefore, a related
party service provides a benefit to a customer of the related party if
it provides ``a reasonably identifiable increment of economic or
commercial value'' to the customer, rather than an indirect or remote
benefit. See Sec. 1.482-9(l)(3)(i) and (ii). Because the benefit test
compares the benefits from the service provided to persons located in
the United States to the total benefits from the service provided by
the renderer (rather than to the total benefits of the service provided
by the related party), a service provided to a related party is
``substantially similar'' to a service provided by the related party to
persons located within the United States if 60 percent or more of the
benefits of the service are conferred on persons located within the
United States, even if the related party adds significant value to the
service through, for instance, bundling the related party service with
other high value services.
Under the price test, a service provided by a renderer to a related
party is ``substantially similar'' to a service provided by the related
party to a person located within the United States if the renderer's
service is used by the related party to provide a service to a person
located within the United States and 60 percent or more of the price
that persons located within the United States pay for the service
provided by the related party is attributable to the renderer's
service. See proposed Sec. 1.250(b)-6(d)(2)(ii). Therefore, the price
test compares the value of the service that is provided by the renderer
to the related party to the value of the service that is provided by
the related party to its customers. Consequently, a related party
service that is not treated as substantially similar to a service
provided by the related party to persons located in the United States
under the benefit test, because more than 40 percent of the benefits
from the service are conferred to persons located outside the United
States, is nonetheless treated as ``substantially similar'' under the
price test if the related party service accounts for 60 percent or more
of the total price that is charged to customers located within the
United States.
If a related party service is treated as substantially similar to a
service provided by the related party to a person located within the
United States solely by reason of the price test, the general rule that
wholly disqualifies the related party service as a FDDEI service does
not apply. Rather, in such case, a portion of the gross income from the
related party service will be treated as a FDDEI service corresponding
to the ratio of benefits conferred by the related party service to
persons not located within the United States to the sum of all benefits
conferred by the related party service. See proposed Sec. 1.250(b)-
6(d)(1).
IV. Section 250 Deduction for Individuals Making a Section 962 Election
As discussed in part II of this Explanation of Provisions section,
the section 250 deduction for FDII and GILTI is available only to
domestic corporations. However, section 962(a)(1) provides that an
individual that is a U.S. shareholder may generally elect to be taxed
on amounts included in the individual's gross income under section
951(a) in ``an amount equal to the tax that would be imposed under
section 11 if such amounts were received by a domestic corporation.''
GILTI is treated as an amount included under section 951(a) for
purposes of section 962. See section 951A(f)(1)(A) and proposed Sec.
1.951A-6(b)(1). A section 962 election can be made by an individual
U.S. shareholder who is considered, by reason of section 958(b), to own
stock of a foreign corporation owned (within the meaning of section
958(a)) by a domestic pass-through entity, including a partnership or
an S corporation. See Sec. 1.962-2(a).
Congress enacted section 962 to ensure that individuals' tax
burdens with respect to undistributed foreign earnings of their CFCs
``will be no heavier than they would have been had they invested in an
American corporation doing business abroad.'' S. Rept. 1881, 1962-3
C.B. 784, at 798. Existing Sec. 1.962-1(b)(1)(i) provides that a
deduction of a U.S. shareholder does not reduce the amount included in
gross income under section 951(a) for purposes of computing the amount
of
[[Page 8200]]
tax that would be imposed under section 11. However, allowing a section
250 deduction with respect to GILTI of an individual (including an
individual that is a shareholder of an S corporation or a partner in a
partnership) that makes an election under section 962 is consistent
with the purpose of that provision of ensuring that such individual's
tax burden with respect to its CFC's undistributed foreign earnings is
no greater than if the individual owned such CFC through a domestic
corporation. Accordingly, the proposed regulations provide that, for
purposes of section 962, ``taxable income'' as used in section 11 of an
electing individual is reduced by the portion of the section 250
deduction that would be allowed to a domestic corporation with respect
to the individual's GILTI and the section 78 gross-up attributable to
the shareholder's GILTI. See proposed Sec. 1.962-1(b)(1)(i)(B)(3).
V. Application of Section 250 to Consolidated Groups
As discussed in the Background section of this preamble, section
250 provides a domestic corporation a deduction for its FDII, GILTI,
and the section 78 gross-up attributable to its GILTI. The section 250
deduction is available to a member of a consolidated group (``member'')
in the same manner as the deduction is available to any domestic
corporation. However, a computation of a member's section 250 deduction
based solely on its items of income and QBAI may not result in a clear
reflection of the consolidated group's income tax liability. For
example, a consolidated group could segregate all of its QBAI in one
member, thereby decreasing the DTIR of other members relative to the
consolidated group's DTIR if determined at a group level.
Alternatively, a strict, separate-entity application of section 250
could inappropriately decrease a consolidated group's aggregate amount
of deduction for its FDII, for instance, because one member's DII
(which is the excess of DEI over DTIR) would not be taken into account
in calculating the FDII of another member that has FDDEI in excess of
its DEI.
Based on the foregoing, the proposed regulations provide that a
member's section 250 deduction is determined by reference to the
relevant items of all members of the same consolidated group.
Consistent with the authority provided by section 1502, the proposed
regulations ensure that the aggregate amount of section 250 deductions
allowed to members appropriately reflects the income, expenses, gains,
losses, and property of all members. Definitions in proposed Sec.
1.1502-50(f) result in the aggregation of the DEI, FDDEI, DTIR, and
GILTI of all members. These aggregate numbers and the consolidated
group's consolidated taxable income are then used to calculate an
overall deduction amount for the group. Proposed Sec. 1.1502-50(b)
then allocates this overall deduction amount among the members on the
basis of their respective contributions to the consolidated group's
aggregate amount of FDDEI and the consolidated group's aggregate amount
of GILTI.
The proposed regulations also address two issues relating to
intercompany transactions. First, the proposed regulations add an
example to Sec. 1.1502-13 demonstrating the applicability of the
attribute redetermination rule of Sec. 1.1502-13(c)(1)(i) to the
determination of FDDEI. This example applies the intercompany
transaction rules to clearly reflect consolidated taxable income. It
does not indicate a change in the law. In this example, the attribute
redetermination rule applies to gross DEI and gross FDDEI, which are
attributes of an intercompany or corresponding item. The Treasury
Department and the IRS were concerned that applying Sec. 1.1502-13(c)
to DEI and FDDEI directly could result in circular computations due to
the apportionment of certain expenses on a gross income basis. In
addition, the example illustrates the applicability of the attribute
redetermination rule in the context of an intercompany loss. In such
circumstances, the application of the allocation and apportionment
rules of Sec. Sec. 1.861-8 through 1.861-14T and 1.861-17 may be
modified in order to achieve the same overall result within the
consolidated group that would occur if the members were divisions of a
single corporation.
Second, the proposed regulations provide that, for purposes of
determining a member's QBAI, the basis of specified tangible property
will not be affected by an intercompany transaction. See proposed Sec.
1.1502-50(c)(1). Accordingly, an intercompany transaction cannot result
in the increase or decrease of a consolidated group's aggregate amount
of DTIR or, in turn, aggregate amount of deduction.
VI. Reporting Requirements
To claim a deduction under section 250 by reason of having FDII, a
taxpayer must calculate its deemed intangible income, deduction
eligible income, and foreign-derived deduction eligible income. None of
these terms are used in other provisions of the Code, and thus pre-
existing forms do not collect data relevant to determining these
amounts. In addition, when calculating its deduction under section 250,
a taxpayer must determine the application of the taxable income
limitation of section 250(a)(2). In order to effectively administer and
enforce section 250, the proposed regulations require the collection of
relevant information on new or existing forms.
A domestic corporation or an individual making an election under
section 962 that claims a deduction under section 250 for a taxable
year must make an annual return on Form 8993, ``Section 250 Deduction
for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-
Taxed Income (GILTI)'' (or any successor form) for such year, providing
the information required by the form. See proposed Sec. 1.250(a)-1(d).
Certain related party transactions are reported on various
information returns under sections 6038 and 6038A. Under section
6038(a)(1), U.S. persons that control foreign business entities
(``controlling U.S. persons'') must report certain information with
respect to those entities, which includes information listed in section
6038(a)(1)(A) through (E), as well as information that ``the Secretary
determines to be appropriate to carry out the provisions of this
title.'' This information is reported on Form 5471, ``Information
Return of U.S. Persons With Respect To Certain Foreign Corporations,''
or Form 8865, ``Return of U.S. Persons With Respect to Certain Foreign
Partnerships,'' as applicable. Section 6038A requires 25-percent
foreign-owned domestic corporations (``reporting corporations'') to
file certain information returns with respect to those corporations,
including information related to transactions between the reporting
corporation and each foreign person which is a related party to the
reporting corporation. This information is reported on Form 5472,
``Information Return of a 25% Foreign-Owned U.S. Corporation or a
Foreign Corporation Engaged in a U.S. Trade or Business.'' In order to
effectively administer and enforce section 250, the proposed
regulations provide that controlling U.S. persons or reporting
corporations, as described above, that claim a deduction under section
250 determined by reference to FDII with respect to amounts reported on
Form 5471, 5472, or 8865 must report certain information relating to
transactions with foreign business entities or related parties in
accordance with sections 6038 and 6038A. See proposed Sec. Sec.
1.6038-2(f)(15), 1.6038-3(g)(4), and 1.6038A-2(b)(5)(iv).
[[Page 8201]]
Certain partnerships and their partners also have reporting
requirements under sections 6031 and 6038 with respect to partnership
income. A domestic partnership is generally required to file an annual
information return (Form 1065, ``U.S. Return of Partnership Income'')
and provide information to its partners on Schedule K-1 (Form 1065),
``Partner's Share of Income, Deductions, Credits, etc.,'' with respect
to each partner's distributive share of partnership items and other
information. See section 6031 and Sec. 1.6031(b)-1T. The proposed
regulations provide that a partnership that has one or more direct or
indirect partners that are domestic corporations and that is required
to file a return under section 6031 must furnish on Schedule K-1 (Form
1065) the partner's share of the partnership's gross DEI, gross FDDEI,
deductions that are definitely related to the partnership's gross DEI
and gross FDDEI, and partnership QBAI for each taxable year in which
the partnership has gross DEI, gross FDDEI, or partnership specified
tangible property. See proposed Sec. 1.250(b)-1(e)(2). Although a
foreign partnership that does not have income effectively connected
with a trade or business within the United States or U.S. source income
is not required to file Form 1065, a U.S. person who owns a ten-percent
interest or a fifty-percent interest of a foreign partnership
controlled by U.S. persons is required to report certain information
under section 6038. Similar to the requirements for partnership
reporting on Form 1065, the proposed regulations require controlling
ten-percent partners and controlling fifty-percent partners (as defined
in Sec. 1.6038-3(a)(1) and (2)) of certain foreign partnerships
controlled by U.S. persons to report on Schedule K-1 (Form 8865),
``Partner's Share of Income, Deductions, Credits, etc.,'' the partner's
share of the partnership's gross DEI, gross FDDEI, deductions that are
definitely related to the partnership's gross DEI and gross FDDEI, and
partnership QBAI. See proposed Sec. 1.6038-3(g)(4).
VII. Applicability Dates
Proposed Sec. Sec. 1.250(a)-1 through 1.250(b)-6 are proposed to
apply to taxable years ending on or after March 4, 2019. See section
7805(b)(1)(B). However, the Treasury Department and the IRS recognize
that these rules may apply to transactions that have occurred before
the filing of these proposed regulations and that taxpayers may not be
able to obtain the documentation required for transactions that have
already been completed. Accordingly, for taxable years beginning on or
before March 4, 2019, taxpayers may use any reasonable documentation
maintained in the ordinary course of the taxpayer's business that
establishes that a recipient is a foreign person, property is for a
foreign use (within the meaning of proposed Sec. 1.250(b)-4(d) and
(e)), or a recipient of a general service is located outside the United
States (within the meaning of proposed Sec. 1.250(b)-5(d)(2) and
(e)(2)), as applicable, in lieu of the documentation required in
proposed Sec. Sec. 1.250(b)-4(c)(2), (d)(3), and (e)(3) and 1.250(b)-
5(d)(3) and (e)(3), provided that such documentation meets the
reliability requirements described in proposed Sec. 1.250(b)-3(d).
Reasonable documentation includes, but is not limited to, documents
described in or similar to the documents described in proposed
Sec. Sec. 1.250(b)-4(c)(2), (d)(3), and (e)(3) and 1.250(b)-5(d)(3)
and (e)(3). For this purpose, reasonable documentation also includes
the documentation described in the special rules for small businesses
and small transactions in proposed Sec. Sec. 1.250(b)-4(c)(2)(ii) and
(d)(3)(ii) and 1.250(b)-5(d)(3)(ii) and (e)(3)(ii), even if the
taxpayer would not otherwise qualify for the special rules. The
Treasury Department and the IRS welcome comments on this special
applicability date rule.
Proposed Sec. 1.962-1(b)(1)(i)(B)(3), which allows individuals
making an election under section 962 to take into account the section
250 deduction, is proposed to apply to taxable years of a foreign
corporation ending on or after March 4, 2019, and with respect to a
U.S. person, for the taxable year in which or with which such taxable
year of the foreign corporations ends. See id. Taxpayers may rely on
proposed Sec. Sec. 1.250(a)-1 through 1.250(b)-6 and Sec. 1.962-
1(b)(1)(i)(B)(3) for taxable years ending before May 4, 2019.
Proposed Sec. 1.1502-50 is proposed to apply to consolidated
return years ending on or after the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register. See sections 1503(a) and 7805(b)(1)(A). Taxpayers may rely on
proposed Sec. 1.1502-50 for taxable years ending before the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register.
Proposed Sec. Sec. 1.6038-2(f)(15) and 1.6038A-2(b)(5)(iv) are
proposed to apply with respect to information for annual accounting
periods beginning on or after May 4, 2019. See sections 6038(a)(3) and
7805(b)(1)(B). Proposed Sec. 1.6038-3(g)(4) is proposed to apply to
taxable years of a foreign partnership beginning on or after May 4,
2019. See section 7805(b)(1)(B).
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 13563 and 12866 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
These proposed regulations have been designated as economically
significant by the Office of Management and Budget's Office of
Information and Regulatory Affairs (OIRA) and subject to review under
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
A. Background
As described in part I of the Explanation of Provisions section,
the section 250 deduction is an important component of the changes to
the U.S. international tax system included in the Act. The purpose of
the section 250 deduction is to minimize the role that U.S. tax
considerations play in a domestic corporation's decision whether to
service foreign markets directly or through a controlled foreign
corporation (``CFC''). See Senate Explanation, at 370 (``[O]ffering
similar, preferential rates for intangible income derived from serving
foreign markets, whether through U.S.-based operations or through CFCs,
reduces or eliminates the tax incentive to locate or move intangible
income abroad, thereby limiting one margin where the Code distorts
business investment decisions.''). Further, the section 250 deduction
protects the U.S. tax base against base erosion incentives created by
the new participation exemption system established under section 245A,
discussed in part I of the Explanation of Provisions section. At the
most basic level, the section 250 deduction is allowed to a domestic
corporation with respect to its intangible income derived from foreign
markets, resulting in a lower effective rate of U.S. tax on its global
intangible low-taxed income
[[Page 8202]]
(``GILTI'') and foreign-derived intangible income (``FDII'').
The Act defines a corporation's FDII as the portion of its return
in excess of a return on tangible assets that is derived from serving
foreign markets, while it defines a corporation's GILTI as the portion
of its return in excess of a return on tangible assets that is derived
through its foreign affiliates. FDII and GILTI are calculated through
formulas set out in sections 250 and 951A, respectively. For taxable
years between 2018 and 2026, section 250 generally allows a deduction
equal to the sum of 37.5 percent of the corporation's FDII plus 50
percent of its GILTI (thereafter, these deductions are reduced to
21.875 percent and 37.5 percent, respectively). These deduction rates
produce comparable tax rates on income earned from serving foreign
markets, regardless of where such income is earned. Different
percentages are required by the Act to achieve approximate parity,
given that the 80 percent limitation on foreign tax credits in section
960(d) results in additional U.S. tax.\2\ More specifically, the Act
defines a domestic corporation's FDII as its deemed intangible income
(``DII'') multiplied by the percentage of its deduction eligible income
(``DEI'') that is foreign-derived deduction eligible income
(``FDDEI''). The Act defines DEI as the excess of the corporation's
gross income (with certain exclusions \3\) over deductions (including
taxes) properly allocable to the income. The Act defines DII as the
excess (if any) of its DEI over 10 percent of its qualified business
asset investment (``QBAI''), or tangible asset base. The Act defines
FDDEI as DEI derived from sales of property to foreign persons for
foreign use and from the provision of services to persons, or with
respect to property, located outside the United States. Finally, if the
sum of a corporation's FDII and GILTI exceeds its taxable income
(determined without regard to section 250), then the Act requires that
the amount of FDII and GILTI for which a deduction is allowed is
reduced pro rata by the excess. While the Act provides the framework
for determining a domestic corporation's FDII, it grants discretion to
the Secretary to establish how certain requirements, such as whether
sales are for a foreign use, are satisfied. See sections 250(b)(4)(A)
and (B), (b)(5)(C)(i)(II), and (b)(5)(C)(ii). In addition, the Act does
not address all of the details necessary to calculate FDII, such as the
allocation of expenses. Further, the Act is unclear regarding whether
the section 250 deduction for FDII is available for certain foreign
military sales or services and whether a section 250 deduction for
GILTI is available for an individual taxpayer making a section 962
election. The following analysis describes the need for the proposed
regulations and discusses the costs and benefits relative to the
baseline, as well as the important alternative regulatory choices that
were considered.
---------------------------------------------------------------------------
\2\ At the most basic level, abstracting from various
complexities of the GILTI regime, the 21 percent U.S. statutory rate
with a 50 percent deduction for GILTI implies that at foreign
effective rates in excess of 10.5 percent (assuming no U.S.
expenses), foreign tax credits are sufficient to fully offset U.S.
tax on GILTI income. However, the GILTI regime limits foreign tax
credits to 80 percent of their total value, so a ``baseline'' GILTI
scenario, with zero expense allocations, implies that foreign tax
credits can fully offset U.S. tax on GILTI at foreign effective tax
rates in excess of 13.125 percent (i.e., 10.5/0.8). The section 250
deduction for FDII is also intended to have a ``baseline rate'' of
13.125 percent (i.e., 0.21 x (1-0.375)); typically foreign tax
credits are not relevant for FDII, and there is no 80 percent
limitation applied to foreign tax credits with respect to FDII.
\3\ The exclusions are: (1) Subpart F inclusions (section 951);
(2) GILTI; (3) financial services income (as defined in section
904(d)(2)(D)); (4) dividends received from the corporation's CFCs;
(5) domestic oil and gas extraction income; and (6) foreign branch
income (as defined in section 904(d)(2)(J)).
---------------------------------------------------------------------------
B. The Need for Proposed Regulations
The purpose of the proposed regulations is to provide guidance to
taxpayers in determining the amount of their deduction under section
250. Section 250(c) states that ``[t]he Secretary shall prescribe such
regulations or other guidance as may be necessary or appropriate to
carry out the provisions of [section 250].'' Therefore, the proposed
regulations seek to provide the detail, structure, and language
required to implement section 250.
The proposed regulations seek to assist taxpayers in calculating
the allowable section 250 deduction, for example, by providing details
on how to compute FDII, and the components of FDII such as QBAI, DEI,
and FDDEI. In particular, with respect to FDDEI, the proposed
regulations provide guidance on which sales of property and which
provisions of services generate gross income included in FDDEI, and on
how to allocate expenses to such gross income to determine FDDEI.
In addition, the proposed regulations provide an ordering rule to
coordinate the computation of the section 250 taxable income limitation
with the taxable income limitations across other provisions of the
Code.
The proposed regulations also seek to clarify that the section 250
deduction for FDII is available for certain foreign military sales and
services. In addition, the proposed regulations allow a section 250
deduction to individual taxpayers with respect to GILTI if they make an
election under section 962.
Finally and importantly, the proposed regulations also seek to
provide clarity and guidance regarding the types of documentation
required to substantiate that, in fact, sales of property are to
foreign persons for a foreign use and provisions of services are to
persons, or with respect to property, located outside the United
States. In developing the proposed regulations, the Treasury Department
and the IRS sought to balance the need for rigorous documentation to
ensure compliance with the desire to minimize administrative burden and
costs to taxpayers.
C. Baseline
The economic analysis that follows compares the proposed
regulations to a no-action baseline reflecting anticipated Federal
income tax-related behavior in the absence of the proposed regulations.
A no-action baseline reflects the current environment including the
existing international tax regulations, prior to any amendment by the
proposed regulations.
D. Cost and Benefits of the Proposed Regulations and Potential
Alternatives
The proposed regulations provide certainty, clarity, and
consistency in the application of the section 250 deduction by
unambiguously defining terms, calculations, and acceptable forms of
documentation, and also by making clear the conditions under which
military sales are eligible to claim the deduction. In the absence of
such guidance, the chance that different taxpayers would interpret the
statute differently would be exacerbated. Similarly situated taxpayers
might interpret the statutory rules pertaining to particular sales or
services differently, with one taxpayer pursuing a sale that another
taxpayer might decline to make, because of different interpretations of
how the income would be treated under section 250. If this second
taxpayer's activity were more profitable, an economic loss arises. Such
situations are more likely to arise in the absence of guidance. While
no guidance can curtail all differential or inaccurate interpretations
of the statute, the proposed regulations will significantly mitigate
the chance for such interpretations and thereby increase economic
efficiency.
In general, the Treasury Department and the IRS expect that in the
absence of this guidance, taxpayers would undertake fewer eligible
sales and services. Thus, the proposed regulation will generally
enhance U.S. sales and
[[Page 8203]]
services across all eligible activities. The Treasury Department and
the IRS have not made quantitative estimates of these effects.
The benefits and costs of major, specific provisions of these
proposed regulations relative to the no-action baseline and
alternatives to these proposed rules considered by the Treasury
Department and the IRS are discussed in further detail below.
1. Documentation Requirements
The proposed regulations set forth what forms of documentation can
be used to substantiate that receipts qualify as ``foreign-derived''
for purposes of FDII and the section 250 deduction. In general, the
Treasury Department and the IRS weighed the compliance burden imposed
on taxpayers from documentation requirements against the need for
documentation to be sufficiently rigorous in establishing foreign use
or the location of a person that receives a service. Because the
statute provides different requirements for sales or services to
qualify for a section 250 deduction and the proposed regulations
provide different requirements depending on the type of sale or the
type of service, and because documentation needs to be tailored to the
applicable requirement, the proposed regulations specify different
types of acceptable documentation for different types of transactions.
In particular, documentation requirements vary with respect to the
determination of whether a sale of property is to a foreign person,
whether a sale of general property is for a foreign use, whether a sale
of intangible property is for a foreign use, whether an individual
consumer of a general service is located outside the United States, and
whether a business recipient of a general service is located outside
the United States.
In each case, the proposed regulations provide that the list of
acceptable documentation constitutes reasonable proof that a
transaction is a FDDEI transaction. In general, the types of
documentation listed are readily accessible to most taxpayers. For
example, with respect to demonstrating foreign use for general
property, taxpayers can show evidence of shipment to a location outside
the United States (presuming that the seller has no knowledge or reason
to know that that information is unreliable or incorrect).
To further reduce compliance burdens, the proposed regulations
allow additional flexibility for particular types of taxpayers or
transactions. For example, throughout the proposed regulations, small
businesses (defined in the proposed regulations as taxpayers with less
than $10 million of gross receipts annually) are subject to less
stringent documentation requirements because their smaller scale makes
compliance more burdensome for them and makes the sophisticated tax
minimization planning that can sometimes characterize abuse unlikely.
Small transactions (defined in the proposed regulations as less than
$5,000 of gross receipts from a single recipient) are also subject to
less stringent documentation requirements, because the fixed costs of
compliance likely account for a larger fraction of the profit on small
transactions, and large scale abuse is less likely. The Treasury
Department and the IRS request comments on whether the thresholds in
the proposed regulations for small businesses and small transactions
are appropriate and especially solicit comments that provide data,
other evidence, and models that can enhance the rigor of the process by
which such thresholds are determined. Further, the proposed regulations
allow a more flexible approach for the documentation of sales of
fungible general property because it is burdensome and unnecessary to
track each sale of a fungible item as long as the taxpayer can
establish by documentation that a certain percentage of the fungible
property is for a foreign use.
In determining appropriate documentation requirements, the Treasury
Department and the IRS balanced the rigor and reliability of the proof
that transactions are foreign-derived with the cost to taxpayers of
obtaining such documentation. The Treasury Department and the IRS
considered a spectrum of trade-offs between the rigor of proof of
foreign use and the burden such proof would impose on taxpayers. One
option considered was allowing only the most stringent form of
documentation in each case (for example, a written statement of foreign
use made under penalties of perjury, plus evidence of such use) without
any flexibility, but this was deemed overly burdensome for taxpayers
and foreign buyers. Overly burdensome documentation requirements might
shift transactions to sellers that do not need or cannot use the FDII
deduction, or it may discourage foreign persons from transacting with a
U.S. seller or renderer. The Treasury Department and the IRS aimed to
propose rules that would not alter economic decisions because of these
concerns. In addition, highly burdensome rules may lead to abuse. For
example, a foreign buyer that falsifies documentation provided to a
domestic corporation to allow the corporation to obtain a deduction
would not be subject to penalties by the IRS. Because the incentives
for compliance by foreign buyers are limited (for example, contractual
liability between the parties), the burden should also be limited. In
comparison, chapters 3 and 4 of subtitle A of the Code require U.S.
financial institutions to withhold on certain payments to foreign
persons if they do not provide documentation. Because of the
enforcement mechanism built into the statutes in chapters 3 and 4
(i.e., withholding), the IRS can require stricter documentation (for
example, most foreign persons have to provide to the financial
institution a specific IRS form, completed and signed under penalties
of perjury, and in some cases must attach additional documentation on
underlying payees).
The Treasury Department and the IRS also considered a system in
which taxpayers submitted documentation in advance of a potential FDDEI
transaction for the IRS to review and determine whether the
documentation is sufficient. This option was rejected because the time
involved would delay normal business transactions.
A third option that the Treasury Department and the IRS considered
was to allow a taxpayer to use its discretion to determine what type of
documentation is appropriate, but this would not provide sufficient
clarity and assurance to taxpayers and is potentially open to abuse.
For each type of transaction, the Treasury Department and the IRS chose
to allow a menu of acceptable documentation options that vary according
to the type of transaction, and selected documentation options that
would be readily available to the taxpayer whenever possible. By
allowing taxpayers to, in some cases, rely on documents already
obtained in the normal course of business, the proposed regulations
impose essentially zero documentation cost in such cases. The Treasury
Department and the IRS request comments on the approaches and decisions
relating to documentation requirements discussed in this part I(D)(1)
of this Special Analyses section. See part II of this Special Analyses
section regarding the Paperwork Reduction Act for additional discussion
on the expected paperwork burden of these documentation requirements.
2. Computation of the Ratio of FDDEI to DEI
The proposed regulations provide guidance on the computation of the
foreign-derived ratio. As noted in part I(A) of this Special Analyses
section, the
[[Page 8204]]
Act defines a corporation's FDII as its DII multiplied by the
corporation's foreign-derived ratio, which is the ratio of its DEI to
its FDDEI. The proposed regulations specify that, for purposes of
determining the numerator of the foreign-derived ratio, the domestic
corporation must allocate expenses to its gross FDDEI. The Treasury
Department and the IRS deemed this approach the most consistent with
the statute by providing what the Treasury Department and the IRS have
determined to be the most accurate measure of the corporation's income
that is ``foreign-derived,'' through matching of expenses to gross
income.
The Treasury Department and the IRS considered two other
approaches; one, in which the foreign-derived ratio would be computed
as the ratio of foreign versus U.S. gross receipts and another in which
the ratio would be computed as foreign versus U.S. gross income. The
Treasury Department and the IRS have determined that both of these
approaches would result in a less accurate measure of foreign-derived
net income. The Treasury Department and the IRS have determined that
these alternative approaches could also reward low margin (or even
loss-leading) sales or services to foreign markets by allowing a
section 250 deduction due to positive gross receipts or income from
foreign sources, even if the net income from foreign sources after
allocated expenses is zero or negative. The Treasury Department and the
IRS have determined that the chosen alternative generally provides the
most accurate computation of FDII but solicit comments on whether an
alternative method would be more appropriate.
3. Military Sales
Section 250 requires sales to be made to a foreign person and
services to be provided to a person located outside the United States
but does not include specific rules applicable to foreign military
sales or services. For example, many sales of military equipment and
services by a U.S. defense contractor to a foreign government are
structured, pursuant to the Arms Export Control Act, as sales and
services provided to the U.S. government for resale or on-service to
the foreign government. See part III(B)(2) of the Explanation of
Provisions section for additional discussion of the Arms Export Control
Act. In effect, the contractor is selling goods and services to a
foreign person, but the sale is technically made to the U.S.
government. The Treasury Department and the IRS recognize that the
statute is unclear as to whether certain foreign military sales and
services can qualify for the section 250 deduction, due to the concern
that a foreign military sale or service pursuant to the Arms Export
Control Act would not qualify as a sale or service to a foreign person
since the sale is actually made to the U.S. government and not to a
foreign person or a person located outside the United States.
The Treasury Department and the IRS considered several options for
addressing this issue. One option was not addressing this issue in the
proposed regulations. This option was rejected because the Treasury
Department and the IRS determined that it would perpetuate uncertainty
about the application of section 250 to foreign military sales and
services and could result in economic inequities if some taxpayers took
the position that foreign military sales and services qualify for a
section 250 deduction but other similarly-situated taxpayers took the
position that such sales and services do not qualify. A second option
the Treasury Department and the IRS considered was to clarify that a
foreign military sale or service through the U.S. government can never
qualify for a section 250 deduction. However, this option was rejected
because the Treasury Department and the IRS determined that it would
treat taxpayers in the defense industry inequitably relative to other
industries by denying them a section 250 deduction with respect to a
significant amount of their foreign market sales or services. A third
option the Treasury Department and the IRS considered was to allow any
sale or service to a U.S. person that acts as an intermediary and does
not take on the benefits and burdens of ownership to potentially
qualify for a section 250 deduction if there is an ultimate foreign
recipient. This option was rejected because the Treasury Department and
the IRS determined that such a broad exception would allow multiple
deductions in instances where both the seller and the intermediary
buyer are U.S. taxpayers, because both the seller and the intermediary
could potentially qualify for a section 250 deduction. In contrast, the
U.S. government is not a taxpayer eligible for a section 250 deduction
so only the seller would benefit from a special rule for military
exports. Furthermore, determining whether a party is an
``intermediary'' for this purpose would require a complex facts and
circumstances analysis of whether the party had the benefits and
burdens of ownership, which could create uncertainty in the application
of section 250 with respect to any transaction in which property or
services are sold for resale or on-service.
The proposed regulations provide uniform tax treatment across the
economy by generally allowing all sectors to claim the section 250
deduction, subject to other applicable rules. Otherwise, certain sales
and services by the defense industry that are clearly intended for a
foreign use, and that satisfy all other requirements under section 250,
would be denied the benefit solely as a result of such sales or
services being first made to the U.S. government under the Arms Export
Control Act, whereas other industries that are not subject to the Arms
Export Control Act would not have this concern. Therefore, the proposed
regulations provide that foreign military sales or services to the U.S.
government under the Arms Export Control Act would be treated as a sale
of property or provision of a service to a foreign person. This rule
seeks to provide uniform tax treatment between the defense sector and
other sectors of the U.S. economy with respect to sales and services
that are clearly meant for a foreign use.
4. Section 962
The section 250 deduction for FDII and GILTI is available only to
domestic corporations. However, Congress enacted section 962 in Public
Law 89-834 (1962) to ensure that individuals' tax burdens with respect
to undistributed foreign earnings of their CFCs are comparable with
their tax burdens if they had held their CFCs through a domestic
corporation. See S. Rept. 1881, 87th Cong., 2d Sess. 92 (1962).
Allowing a section 250 deduction with respect to GILTI of an individual
(including an individual that is a shareholder of an S corporation or a
partner in a partnership) that makes an election under section 962
provides comparable treatment for this income.
The Treasury Department and the IRS considered two options with
respect to extending the section 250 deduction to individuals (which
include, for this purpose, individual partners in partnerships and
individual shareholders in S corporations) that make an election under
section 962. The first option considered was to not allow the deduction
for individuals. Not allowing the section 250 deduction would require
that individuals that own their CFCs directly (or indirectly through a
partnership or S corporation) transfer the stock of their CFCs to new
U.S. corporations in order to obtain the benefit of the section 250
deduction. The Treasury Department and the IRS determined that such
reorganization
[[Page 8205]]
would be economically costly, both in terms of legal fees and
substantive economic costs related to organizing and operating new
corporate entities. The second option considered was to give
individuals the section 250 deduction with respect to their GILTI if
they make the section 962 election. The Treasury Department and the IRS
determined that allowing individuals the section 250 deduction would
improve economic efficiency by preventing the need for costly
restructuring solely for the purpose of tax savings. This is the option
adopted by the Treasury Department and the IRS in the proposed
regulations. The Treasury Department and the IRS welcome comments on
whether an alternative approach would be more appropriate.
II. Paperwork Reduction Act
The proposed regulations provide the authority for the IRS to
require taxpayers to file certain forms (identified and discussed in
further detail below) with the IRS to obtain the benefit of the section
250 deduction. In order to provide advance notice and solicit public
comment, the IRS released drafts of the relevant forms in 2018 based on
the statutory language and requested comments. The IRS received no
comments on the forms during the comment period. The 2018 versions of
the forms that were released in 2018 are available at https://www.irs.gov/forms-instructions. The Treasury Department and the IRS are
not proposing to make any changes to those forms through these
regulations. The Treasury Department and the IRS are also soliciting
public comment on the forms and paperwork requirements in general
discussed in the proposed regulations. The Treasury Department and the
IRS specifically request comments on whether there are (1) ways to
reduce the burdens associated with the forms, (2) opportunities to
clarify the forms or associated instructions, or (3) ways to improve
the quality of the collections in general.
The proposed regulations require all taxpayers with a section 250
deduction to file one new form (Form 8993). The proposed regulations
also authorize the IRS to request additional information on several
existing forms (Forms 1065 (Schedule K-1), 5471, 5472, and 8865) if the
filer of the form has a deduction under section 250. With respect to
Forms 5471, 5472, and 8993, the proposed regulations do not specify the
information that will be required from taxpayers that have a section
250 deduction, but instead provide that this information will be
prescribed by the forms and instructions. With respect to Forms 1065
(Schedule K-1) and 8865, the proposed regulations specify the
additional information that must be provided. For additional
explanation of the reporting requirements contained in these proposed
regulations, see part VI of the Explanation of Provisions section. The
rest of this part II of the Special Analyses section provides
additional details on forms and information about the paperwork burden.
The information collection burdens under the Paperwork Reduction
Act, 44 U.S.C. 3501 et seq. (``PRA'') from the proposed regulations are
in proposed Sec. Sec. 1.250(a)-1(d), 1.250(b)-1(e)(2), 1.6038-
2(f)(15), 1.6038-3(g)(4), and 1.6038A-2(b)(5)(iv).
The collection of information in proposed Sec. 1.250(a)-1(d) would
be mandatory for each domestic corporation claiming a deduction under
section 250 as well as for any individual making an election under
section 962 that claims a deduction under section 250 attributable to
the individual's GILTI. The collection of information in proposed Sec.
1.250(a)-1(d) is pursuant to sections 6001 and 6011 and would be
satisfied by submitting a new reporting form, Form 8993, ``Section 250
Deduction for Foreign-Derived Intangible Income (FDII) and Global
Intangible Low-Taxed Income (GILTI),'' with an income tax return. For
purposes of the PRA, the reporting burden associated with proposed
Sec. 1.250(a)-1(d) will be reflected in the PRA submission for new
Form 8993 (OMB control numbers 1545-0123 in the case of business
taxpayers, and 1545-0074 in the case of individual taxpayers).
The collection of information in proposed Sec. 1.250(b)-1(e)(2)
would require each partnership to provide to each of its partners the
partner's distributive share of gross DEI, gross FDDEI, deductions that
are definitely related to the partnership's gross DEI and gross FDDEI,
and partnership QBAI. For purposes of the PRA, the reporting burden
associated with proposed Sec. 1.250(b)-1(e)(2) would be reflected in
the PRA submission for Form 1065 (OMB control number 1545-0123).
The collection of information in proposed Sec. 1.6038-2(f)(15)
would require every U.S. person that controls a foreign corporation
during an annual accounting period and files Form 5471, ``Information
Return of U.S. Persons With Respect to Certain Foreign Corporations,''
for that period. The collection of information in proposed Sec.
1.6038-2(f)(15) would be satisfied by providing information about the
section 250 deduction for the corporation's accounting period as Form
5471 and its instructions may prescribe. For purposes of the PRA, the
reporting burden on the applicable business taxpayers associated with
proposed Sec. 1.6038-2(f)(15) will be reflected in the PRA submission
for Form 5471 (OMB control number 1545-0123).
The collection of information in proposed Sec. 1.6038-3(g)(4)
would be mandatory for every U.S. person that controls a foreign
partnership during the partnership tax year and files Form 8865,
``Return of U.S. Persons With Respect to Certain Foreign
Partnerships,'' for that period. The collection of information in
proposed Sec. 1.6038-3(g)(4) would require a controlling ten-percent
partner or controlling fifty-percent partner to provide to the IRS on
Form 8865 its share of the partnership's gross DEI, gross FDDEI,
deductions that are definitely related to the partnership's gross DEI
and gross FDDEI, and partnership QBAI. For purposes of the PRA, the
reporting burden associated with proposed Sec. 1.6038-3(g)(4) will be
reflected in the PRA submission for Form 8865 (OMB control number 1545-
1668).
The collection of information in proposed Sec. 1.6038A-2(b)(5)(iv)
would be mandatory for every reporting corporation that files Form
5472, ``Information Return of a 25% Foreign-Owned U.S. Corporation or a
Foreign Corporation Engaged in a U.S. Trade or Business,'' for the tax
year. The collection of information in proposed Sec. 1.6038A-
2(b)(5)(iv) would be satisfied by providing information about the
section 250 deduction for the tax year as Form 5472 and its
instructions may prescribe. For purposes of the PRA, the reporting
burden associated with proposed Sec. 1.6038A-2(b)(5)(iv) will be
reflected in the PRA submission for Form 5472 (OMB control number 1545-
0123).
The tax forms that will be created or revised as a result of the
information collections in the proposed regulations, as well as the
estimated number of respondents, are as follows:
[[Page 8206]]
Related New or Revised Tax Forms
----------------------------------------------------------------------------------------------------------------
Number of
New Revision of respondents
existing form (estimated)
----------------------------------------------------------------------------------------------------------------
Form 8993.................................................. [check] ............... 75,000-350,000
Form 1065, Schedule K-1 (for corporate partners only, ............... [check] 15,000-45,000
revision starting TY2020).................................
Form 5471.................................................. ............... [check] 10,000-20,000
Form 8865.................................................. ............... [check] <10,000
Form 5472.................................................. ............... [check] 50,000-80,000
----------------------------------------------------------------------------------------------------------------
Source: RAAS:CDW and ITA
The numbers of respondents in the Related New or Revised Tax Forms
table were estimated by the Research, Applied Analytics and Statistics
Division (``RAAS'') of the IRS from the Compliance Data Warehouse
(``CDW''), using tax years 2014 through 2016; as well as based on
export data from the International Trade Administration (``ITA'') for
2015 and 2016. Tax data for 2017 are not yet available due to extended
filing dates. Data for Form 8993 represent preliminary estimates of the
total number of taxpayers that may be required to file the new Form
8993. The upper bound estimate reflects the total number of exporting
companies reported in the ITA data, as well as the CDW-based counts of
individuals reporting related party transactions. The lower bound
estimate reflects the CDW-based counts of individual and corporate
taxpayers reporting related party transactions. Data for each of the
Forms 1065, 5471, 5472, and 8865 represent preliminary estimates of the
total number of taxpayers that are expected to file these revised forms
regardless of whether that taxpayer must also file Form 8993.
The current status of the Paperwork Reduction Act submissions
related to the tax forms that will be revised as a result of the
information collections in the proposed regulations is provided in the
accompanying table. As described above, the reporting burdens
associated with the information collections in the proposed regulations
are included in the aggregated burden estimates for OMB control numbers
1545-0123 (which represents a total estimated burden time for all forms
and schedules for corporations of 3.157 billion hours and total
estimated monetized costs of $58.148 billion ($2017)), 1545-0074 (which
represents a total estimated burden time, including all other related
forms and schedules for individuals, of 1.784 billion hours and total
estimated monetized costs of $31.764 billion ($2017)), and 1545-1668
(which represents a total estimated burden time for all related forms
and schedules for other filers, in particular trusts and estates, of
281,974 hours and total estimated monetized costs of $25.107 million
($2017)). The overall burden estimates provided for the OMB control
numbers below are aggregate amounts that relate to the entire package
of forms associated with the applicable OMB control number and will in
the future include, but not isolate, the estimated burden of the tax
forms that will be created or revised as a result of the information
collections in the proposed regulations. These numbers are therefore
unrelated to the future calculations needed to assess the burden
imposed by the proposed regulations. These burdens have been reported
for other regulations related to the taxation of cross-border income
and the Treasury Department and the IRS urge readers to recognize that
these numbers are duplicates and to guard against overcounting the
burden that international tax provisions imposed prior to the Act. No
burden estimates specific to the forms affected by the proposed
regulations are currently available. The Treasury Department and the
IRS have not estimated the burden, including that of any new
information collections, related to the requirements under the proposed
regulations. The Treasury Department and the IRS request comments on
all aspects of information collection burdens related to the proposed
regulations, including estimates for how much time it would take to
comply with the paperwork burdens described above for each relevant
form and ways for the IRS to minimize the paperwork burden.
----------------------------------------------------------------------------------------------------------------
Form Type of filer OMB Number(s) Status
----------------------------------------------------------------------------------------------------------------
Form 8993 (NEW)...................... Business (NEW Model)... 1545-0123.............. Published in the
Federal Register
Notice (FRN) on 10/11/
18. Public Comment
period closed on 12/10/
18.
--------------------------------------------------------------------------
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
--------------------------------------------------------------------------
Individual (NEW Model). 1545-0074.............. Limited Scope
submission (1040
only). Full ICR
submission for 2019
for all forms in 3/
2019. 60 Day FRN not
published yet for full
collection for 2019.
--------------------------------------------------------------------------
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031 031.
--------------------------------------------------------------------------
Form 1065, Schedule K-1.............. Business (NEW Model)... 1545-0123.............. Published in the FRN on
10/11/18. Public
Comment period closed
on 12/10/18.
--------------------------------------------------------------------------
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
--------------------------------------------------------------------------
Form 5471............................ Business (NEW Model)... 1545-0123.............. Published in the FRN on
10/11/18. Public
Comment period closed
on 12/10/18.
--------------------------------------------------------------------------
[[Page 8207]]
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
--------------------------------------------------------------------------
Form 8865............................ All other filers 1545-1668.............. Published in the FRN on
(mainly trusts and 10/01/18. Public
estates) (Legacy Comment period closed
system). on 11/30/18.
--------------------------------------------------------------------------
Link: https://www.federalregister.gov/documents/2018/10/01/2018-21288/proposed-collection-comment-request-for-regulation-project.
--------------------------------------------------------------------------
Form 5472............................ Business (NEW Model)... 1545-0123.............. Published in the FRN on
10/11/18. Public
Comment period closed
on 12/10/18.
--------------------------------------------------------------------------
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd.
----------------------------------------------------------------------------------------------------------------
III. Regulatory Flexibility Act
It is hereby certified that this notice of proposed rulemaking will
not have a significant economic impact on a substantial number of small
entities within the meaning of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6). Although the Treasury Department
and the IRS project that the proposed regulations may affect a
substantial number of small entities, the economic impact on small
entities as a result of this notice of proposed rulemaking is not
expected to be significant.
The small business entities that are subject to section 250 and
this notice of proposed rulemaking are small domestic corporations
claiming a deduction under section 250 based on their FDII and GILTI.
Pursuant to proposed Sec. 1.250(a)-1(d), taxpayers are required to
file new Form 8993 to compute the amount of the eligible deduction for
FDII and GILTI under section 250. The Treasury Department and the IRS
estimate that there are between 75,000 and 350,000 respondents of all
sizes that are likely to file Form 8993. The lower end estimate comes
from IRS-collected data on related party transactions that are
indicative of exports to related parties. These data provide a lower
bound for the number of taxpayers that export since related party
exports are only a part of total exports. The IRS does not collect
information on exports to third parties; therefore, International Trade
Administration (``ITA'') statistics of the number of companies engaged
in export activities are used.\4\ The ITA data provide the upper bound
of the estimate of affected taxpayers. The Treasury Department and the
IRS welcome comments on the analysis of number of entities affected,
particularly on how such analysis should take into account different
industries. Additionally, under proposed Sec. 1.250(b)-1(e), a
partnership that has one or more direct or indirect partners that are
domestic corporations and that is required to file a return under
section 6031 must furnish on Schedule K-1 (Form 1065) certain
information that would allow the partner to accurately calculate its
FDII. The Treasury Department and the IRS estimate the number of
domestic corporations that are direct or indirect partners in a
partnership affected by proposed Sec. 1.250(a)-1(e) is between 15,000
and 45,000.
---------------------------------------------------------------------------
\4\ ITA data was accessed at https://tse.export.gov/EDB/SelectReports.aspx?DATA=ExporterDB in December, 2018.
---------------------------------------------------------------------------
In order to substantiate the amount of the section 250 deduction on
Form 8993 related to the calculation of FDII for the sale of property
or the provision of a service, the proposed regulations in Sec. Sec.
1.250(b)-3 through 1.250(b)-5 prescribe different types of
documentation that should be obtained for each transaction. As
discussed in the Explanation of Provisions section of the preamble, the
proposed regulations provide several types of permissible documentation
for the purpose of determining the amount of a domestic corporation's
income that is considered foreign-derived. For example, in the case of
a sale of general property, the seller must (1) obtain documentation
that establishes the recipient's status as a foreign person, such as a
written statement by the recipient indicating that the recipient is a
foreign person; and (2) obtain documentation that the property is for
foreign use, such as proof of shipment of the property to a foreign
address.
To alleviate the burden of documentation on many small businesses
and small transactions, the proposed regulations allow a seller that
has less than $10,000,000 of gross receipts in the prior taxable year,
or less than $5,000 in gross receipts from a single recipient during
the current taxable year, to treat a recipient as a foreign person if
the seller has a shipping address for the recipient that is outside the
United States. The small business and small transaction exceptions to
establish foreign person status are applicable to sales of both general
property and intangible property. Furthermore, to establish that
general property is for a foreign use, certain small businesses and
businesses with small transactions may rely on the existence of a
foreign shipping address for the recipient instead of obtaining
documentation. The proposed regulations also contain small business and
small transaction exceptions related to general services provided to
consumers and business recipients. The Treasury Department and the IRS
anticipate that a substantial share of small entities claiming a
section 250 deduction will qualify for the small business and small
transactions exceptions described above, thereby significantly reducing
the overall burden of the proposed regulations on small entities. The
Treasury Department and the IRS solicit comments on this issue.
The reporting burden for completing Form 8993 is estimated to
average 24 hours for all affected entities, regardless of size. The
reporting burden on small entities (those with receipts below $10
million in RAAS calculations) is estimated to average 15 hours. Based
on the monetized hourly burden reported below, the annual per-entity
reporting burden will be $1,067. The Treasury Department and the IRS
project that compliance with the documentation requirements in the
proposed regulations will have a de minimis or limited impact on all
affected entities, regardless of size, as the majority of taxpayers
will be able to use records that are maintained in the normal course of
business. Small business entities that have less than $10 million of
gross receipts in the prior taxable year, or less than $5,000 in gross
receipts from a single recipient during the current taxable year, are
expected to experience 0 to 5 minutes, with an average of 2.5 minutes,
of recordkeeping
[[Page 8208]]
per transaction recipient. Taxpayers ineligible to qualify for either
exception are expected to experience 0 to 30 minutes, with an average
of 15 minutes, of recordkeeping per transaction recipient. These hourly
estimates were derived by RAAS based the existence of exceptions
available to small businesses, as well as based on the previously noted
overlap between acceptable documentation and records kept in the normal
course of business, suggesting limited impact. The hourly estimates
include all associated activities: recordkeeping, tax planning,
learning about the law, gathering tax materials, form completion and
submissions, and time with a tax preparer or use of tax software. The
estimated monetized burden for compliance is $71.14 per hour, a figure
computed from the IRS Business Taxpayer Burden model which assigns each
firm in the micro data a monetization rate based on total revenue and
assets reported on their tax return. See Tax Compliance Burden (John
Guyton et al., July 2018) at https://www.irs.gov/pub/irs-soi/d13315.pdf. The assigned monetization rates include, in addition to
wages, employer non-wage costs such as employment taxes, benefits, and
overhead. For these reasons, the Treasury Department and the IRS have
determined that the requirements in proposed Sec. Sec. 1.250(a)-1 and
1.250(b)-3 through 1.250(b)-6 will not have a significant economic
impact on a substantial number of small entities. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act is
not required with respect to proposed Sec. Sec. 1.250(a)-1 and
1.250(b)-3 through 1.250(b)-6.
The small business entities that are subject to proposed Sec.
1.6038-2(f)(15) are domestic small business entities that are
controlling U.S. shareholders of a foreign corporation and that claim a
deduction under section 250 by reason of having FDII. For these
purposes, a domestic small business entity controls a foreign
corporation by owning more than 50 percent of that foreign
corporation's stock, measured either by value or voting power. The data
to assess the number of small entities potentially affected by Sec.
1.6038-2(f)(15) are not readily available. However, businesses that are
controlling U.S. shareholders of a foreign corporation are generally
not small businesses because the ownership of sufficient stock in a
foreign corporation in order to be a controlling U.S. shareholder
generally entails significant resources and investment. Therefore, the
Treasury Department and the IRS project that a substantial number of
domestic small business entities will not be subject to proposed Sec.
1.6038-2(f)(15). Consequently, the Treasury Department and the IRS have
determined that proposed Sec. 1.6038-2(f)(15) will not have a
significant economic impact on a substantial number of small entities.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act is not required with respect to the collection of
information requirements of proposed Sec. 1.6038-2(f)(15).
The small business entities that are subject to proposed Sec.
1.6038-3(g)(4) are domestic small entities that are controlling fifty-
percent partners or controlling ten-percent partners of a foreign
partnership and that claim a deduction under section 250 by reason of
having FDII. A controlling fifty-percent partner is a U.S. person that
owns more than a fifty-percent interest in a foreign partnership. A
controlling ten-percent partner is a U.S. person that owns a ten-
percent or greater interest in a foreign partnership that is controlled
by U.S. persons owning at least a ten-percent interest. For these
purposes, a fifty percent interest or ten percent interest in a
partnership is an interest equal to fifty percent or ten percent of the
capital or profits interest in a partnership, or an interest to which
fifty percent or ten percent of the deductions or losses of the
partnership are allocated, respectively. The data to assess the number
of small entities potentially affected by proposed Sec. 1.6038-3(g)(4)
are not readily available. However, businesses that are controlling
fifty-percent partners or controlling ten-percent partners of a foreign
partnership are generally not small businesses because the ownership of
a sufficient interest in a foreign partnership in order to be a
controlling fifty-percent partner or a controlling ten-percent partner
generally entails significant resources and investment. Therefore, the
Treasury Department and the IRS have determined that proposed Sec.
1.6038-3(g)(4) will not affect a substantial number of domestic small
business entities. Moreover, any increase in costs imposed by the rule
is likely to be small, relative to total costs, for any entity.
Consequently, the Treasury Department and the IRS have determined that
proposed Sec. 1.6038-3(g)(4) will not have a significant economic
impact on a substantial number of small entities. Therefore, a
Regulatory Flexibility Analysis under the Regulatory Flexibility Act is
not required with respect to the collection of information requirements
of proposed Sec. 1.6038-3(g)(4).
The small business entities that are subject to proposed Sec.
1.6038A-2(b)(5)(iv) are domestic small entities that are at least 25-
percent foreign-owned, by vote or value, that claim a deduction under
section 250 by reason of having FDII. The data to assess the number of
small entities potentially affected by proposed Sec. 1.6038A-
2(b)(5)(iv) is not readily available. However, domestic corporations
that are at least 25-percent foreign-owned are generally not small
businesses because a foreign person's ownership of at least 25 percent
of a domestic corporation, whether by vote or value, generally entails
significant resources and investment, and a foreign person is unlikely
to expend such resources to invest in a small domestic entity.
Therefore, the Treasury Department and the IRS project that a
substantial number of domestic small business entities will not be
subject to proposed Sec. 1.6038A-2(b)(5)(iv). Consequently, the
Treasury Department and the IRS have determined that that proposed
Sec. 1.6038A-2(b)(5)(iv) will not have a significant economic impact
on a substantial number of small entities. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act is not
required with respect to the collection of information requirements of
proposed Sec. 1.6038A-2(b)(5)(iv).
Notwithstanding this certification, the Treasury Department and the
IRS invite comments from the public on both the number of entities
affected and the economic impact of this proposed rule on small
entities.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
businesses.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2018, that threshold is approximately $150 million. This
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
[[Page 8209]]
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This proposed rule does not have
federalism implications, does not impose substantial direct compliance
costs on state and local governments, and does not preempt state law
within the meaning of the Executive Order.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written or electronic comments that
are submitted timely to the IRS as prescribed in this preamble under
the ADDRESSES section. Comments are requested on all aspects of the
proposed regulations. In addition, the Treasury Department and the IRS
solicit comments regarding the appropriateness of the numerical
thresholds in the following provisions, along with data, other
evidence, and models that can enhance the rigor of the process by which
such thresholds are determined: proposed Sec. 1.250(b)-4(c)(2)(ii),
(d)(2)(iii)(C), (d)(2)(iv), (d)(3)(ii) and (iii); proposed Sec.
1.250(b)-5(c)(5), (c)(6), (d)(3)(ii), (e)(3)(ii), and (h); and proposed
Sec. 1.250(b)-6(c)(1)(ii) and (d)(2).
All comments will be available at https://www.regulations.gov or
upon request. A public hearing will be scheduled if requested in
writing by any person that timely submits written comments. If a public
hearing is scheduled, notice of the date, time, and place for the
public hearing will be published in the Federal Register.
Drafting Information
The principal authors of these proposed regulations are Kenneth
Jeruchim of the Office of the Associate Chief Counsel (International)
and Michelle A. Monroy and Austin Diamond-Jones of the Office of
Associate Chief Counsel (Corporate). However, other personnel from the
Treasury Department and the IRS participated in their development.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin and are available from the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20402, or by visiting the
IRS website at https://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order for Sec. Sec. 1.250-1 and 1.250(a)-1
through 1.250(b)-6, revising the entries for Sec. Sec. 1.1502-12 and
1.1502-13, and adding an entry in numerical order for Sec. 1.1502-50
to read in part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Sections 1.250-1 and 1.250(a)-1 through 1.250(b)-6 also issued
under 26 U.S.C. 250(c).
Sections 1.250(a)-1 and 1.250(b)-1 also issued under 26 U.S.C.
6001 and 6011(a).
* * * * *
Section 1.1502-12 also issued under 26 U.S.C. 250(c) and 1502.
Section 1.1502-13 also issued under 26 U.S.C. 250(c) and 1502.
* * * * *
Section 1.1502-50 also issued under 26 U.S.C. 250(c) and 1502.
* * * * *
0
Par. 2. Sections 1.250-0, 1.250-1, and 1.250(a)-1 through 1.250(b)-6
are added to read as follows:
Sec.
* * * * *
1.250-0 Table of contents.
1.250-1 Introduction.
1.250(a)-1 Deduction for foreign-derived intangible income and
global intangible low-taxed income.
1.250(b)-1 Computation of foreign-derived intangible income (FDII).
1.250(b)-2 Qualified business asset investment.
1.250(b)-3 FDDEI transactions.
1.250(b)-4 FDDEI sales.
1.250(b)-5 FDDEI services.
1.250(b)-6 Related party transactions.
* * * * *
Sec. 1.250-0 Table of contents.
This section lists the table of contents for Sec. Sec. 1.250-1
through 1.250(b)-6.
Sec. 1.250-1 Introduction.
(a) Overview.
(b) Applicability dates.
Sec. 1.250(a)-1 Deduction for foreign-derived intangible income and
global intangible low-taxed income.
(a) Scope.
(b) Allowance of deduction.
(1) In general.
(2) Taxable income limitation.
(3) Reduction in deduction for taxable years after 2025.
(4) Treatment under section 4940.
(c) Definitions.
(1) Domestic corporation.
(2) Foreign-derived intangible income.
(3) Global intangible low-taxed income.
(4) Section 250(a)(2) amount.
(d) Reporting requirement.
(e) Determination of deduction for consolidated groups.
(f) Examples.
Sec. 1.250(b)-1 Computation of foreign-derived intangible income
(FDII).
(a) Scope.
(b) Definition of foreign-derived intangible income.
(c) Definitions.
(1) Controlled foreign corporation.
(2) Deduction eligible income.
(3) Deemed intangible income.
(4) Deemed tangible income return.
(5) Dividend.
(6) Domestic corporation.
(7) Domestic oil and gas extraction income.
(8) FDDEI sale.
(9) FDDEI service.
(10) FDDEI transaction.
(11) Foreign branch income.
(12) Foreign-derived deduction eligible income.
(13) Foreign-derived ratio.
(14) Gross DEI.
(15) Gross FDDEI.
(16) Gross non-FDDEI.
(17) Modified affiliated group.
(i) In general.
(ii) Special rule for noncorporate entities.
(iii) Definition of control.
(18) Qualified business asset investment.
(19) Related party.
(20) United States shareholder.
(d) Treatment of cost of goods sold and allocation and
apportionment of deductions.
(1) Cost of goods sold for determining gross DEI and gross FDDEI.
(2) Deductions properly allocable to gross DEI and gross FDDEI.
(i) In general.
(ii) Determination of deductions to allocate.
(3) Examples.
(e) Domestic corporate partners.
(1) In general.
(2) Reporting requirement for partnership with domestic corporate
partners.
[[Page 8210]]
(3) Examples.
(f) Determination of foreign-derived intangible income for
consolidated groups.
(g) Determination of foreign-derived intangible income for tax-
exempt corporations.
Sec. 1.250(b)-2 Qualified business asset investment.
(a) Scope.
(b) Definition of qualified business asset investment.
(c) Specified tangible property.
(1) In general.
(2) Tangible property.
(d) Dual use property.
(1) In general.
(2) Dual use ratio.
(3) Example.
(e) Determination of adjusted basis of specified tangible property.
(1) In general.
(2) Effect of change in law.
(3) Specified tangible property placed in service before enactment
of section 250.
(f) Special rules for short taxable years.
(1) In general.
(2) Determination of quarter closes.
(3) Reduction of qualified business asset investment.
(4) Example.
(g) Partnership property.
(1) In general.
(2) Definitions related to partnership QBAI.
(i) In general.
(ii) Partnership QBAI ratio.
(iii) Partnership specified tangible property.
(3) Determination of adjusted basis.
(4) Example.
(h) Anti-avoidance rule for certain transfers of property.
(1) In general.
(2) Rule for structured arrangements.
(3) Per se rules for certain transactions.
(4) Definitions related to anti-avoidance rule.
(i) Disqualified period.
(ii) FDII-eligible related party.
(iii) Specified related party.
(iv) Transfer.
(5) Examples.
Sec. 1.250(b)-3 FDDEI transactions.
(a) Scope.
(b) Definitions.
(1) FDII filing date.
(2) Foreign person.
(3) General property.
(4) Intangible property.
(5) Recipient.
(6) Renderer.
(7) Sale.
(8) Seller.
(9) United States.
(10) United States person.
(11) United States territory.
(c) Foreign military sales.
(d) Reliability of documentation.
(e) Transactions with multiple elements.
(f) Treatment of certain loss transactions.
(1) In general.
(2) Example.
(g) Treatment of partnerships.
(1) In general.
(2) Examples.
Sec. 1.250(b)-4 FDDEI sales.
(a) Scope.
(b) Definition of FDDEI sale.
(c) Foreign person.
(1) In general.
(2) Documentation of status as a foreign person.
(i) In general.
(ii) Special rules.
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(d) Foreign use for general property.
(1) In general.
(2) Determination of foreign use.
(i) In general.
(ii) Determination of domestic use.
(iii) Determination of manufacture, assembly, or other processing.
(A) In general.
(B) Property subject to a physical and material change.
(C) Property incorporated into second product as a component.
(iv) Determination of foreign use for transportation property.
(3) Documentation of foreign use of general property.
(i) In general.
(ii) Special rules.
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(iii) Sales of fungible mass of general property.
(4) Examples.
(e) Foreign use for intangible property.
(1) In general.
(2) Determination of foreign use.
(i) In general.
(ii) Sales in exchange for periodic payments.
(iii) Sales in exchange for a lump sum.
(3) Documentation of foreign use of intangible property.
(i) Documentation for sales for periodic payments.
(ii) Certain sales to foreign unrelated parties
(iii) Documentation for sales in exchange for a lump sum.
(4) Examples.
(f) Special rule for certain financial instruments.
Sec. 1.250(b)-5 FDDEI services.
(a) Scope.
(b) Definition of FDDEI service.
(c) Definitions.
(1) Benefit.
(2) Business recipient.
(3) Consumer.
(4) General service.
(5) Property service.
(6) Proximate service.
(7) Transportation service.
(d) General services provided to consumers.
(1) In general.
(2) Location of consumer.
(3) Documentation of location of consumer.
(i) In general.
(ii) Special rules
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(e) General services provided to business recipients.
(1) In general.
(2) Location of business recipient.
(i) In general.
(A) Determination of business operations that benefit from the
service.
(B) Determination of amount of benefit conferred on operations
outside the United States.
(ii) Location of business recipient's operations.
(3) Documentation of location of business recipient.
(i) In general.
(ii) Special rules.
(A) Special rule for small businesses.
(B) Special rule for small transactions.
(4) Related parties.
(5) Examples.
(f) Proximate services.
(g) Property services.
(h) Transportation services.
Sec. 1.250(b)-6 Related party transactions.
(a) Scope.
(b) Definitions.
(1) Foreign related party.
(2) Foreign unrelated party.
(3) Related party sale.
(4) Related party service.
(5) Unrelated party transaction.
(c) Related party sales.
(1) In general.
(i) Sale of property in an unrelated party transaction.
(ii) Use of property in an unrelated party transaction.
(2) Treatment of foreign related party as seller or renderer.
(3) Transactions between a foreign related party and other foreign
related parties.
(4) Example.
(d) Related party services.
(1) In general.
(2) Substantially similar services.
(3) Location of recipient of services provided by related party.
(4) Examples.
[[Page 8211]]
Sec. 1.250-1 Introduction.
(a) Overview. Sections 1.250(a)-1 through 1.250(b)-6 provide rules
to determine a domestic corporation's section 250 deduction. Section
1.250(a)-1 provides rules to determine the amount of a domestic
corporation's deduction for foreign-derived intangible income and
global intangible low-taxed income. Section 1.250(b)-1 provides general
rules and definitions regarding the computation of foreign-derived
intangible income. Section 1.250(b)-2 provides rules for determining a
domestic corporation's qualified business asset investment. Section
1.250(b)-3 provides general rules and definitions regarding the
determination of gross foreign-derived deduction eligible income.
Section 1.250(b)-4 provides rules regarding the determination of gross
foreign-derived deduction eligible income from the sale of property.
Section 1.250(b)-5 provides rules regarding the determination of gross
foreign-derived deduction eligible income from the provision of a
service. Section 1.250(b)-6 provides rules regarding the sale of
property or provision of a service to a related party.
(b) Applicability dates. Sections 1.250(a)-1 through 1.250(b)-6
apply to taxable years ending on or after March 4, 2019. However, for
taxable years beginning on or before March 4, 2019, taxpayers may use
any reasonable documentation maintained in the ordinary course of the
taxpayer's business that establishes that a recipient is a foreign
person, property is for a foreign use (within the meaning of Sec.
1.250(b)-4(d) and (e)), or a recipient of a general service is located
outside the United States (within the meaning of Sec. 1.250(b)-5(d)(2)
and (e)(2)), as applicable, in lieu of the documentation required in
Sec. Sec. 1.250(b)-4(c)(2), (d)(3), and (e)(3) and 1.250(b)-5(d)(3)
and (e)(3), provided that such documentation meets the reliability
requirements described in Sec. 1.250(b)-3(d).
Sec. 1.250(a)-1 Deduction for foreign-derived intangible income and
global intangible low-taxed income.
(a) Scope. This section provides rules for determining the amount
of a domestic corporation's deduction for foreign-derived intangible
income and global intangible low-taxed income. Paragraph (b) of this
section provides general rules for determining the amount of the
deduction. Paragraph (c) of this section provides definitions relevant
for determining the amount of the deduction. Paragraph (d) of this
section provides reporting requirements for a domestic corporation
claiming the deduction. Paragraph (e) of this section provides a rule
for determining the amount of the deduction of a member of a
consolidated group. Paragraph (f) of this section provides examples
illustrating the application of this section.
(b) Allowance of deduction--(1) In general. A domestic corporation
is allowed a deduction for any taxable year equal to the sum of--
(i) 37.5 percent of its foreign-derived intangible income for the
year; and
(ii) 50 percent of--
(A) Its global intangible low-taxed income for the year; and
(B) The amount treated as a dividend received by the corporation
under section 78 which is attributable to its global intangible low-
taxed income for the year.
(2) Taxable income limitation. In the case of a domestic
corporation with a section 250(a)(2) amount for a taxable year, for
purposes of applying paragraph (b)(1) of this section for the year--
(i) The corporation's foreign-derived intangible income for the
year (if any) is reduced (but not below zero) by an amount that bears
the same ratio to the corporation's section 250(a)(2) amount that the
corporation's foreign-derived intangible income for the year bears to
the sum of the corporation's foreign-derived intangible income and
global intangible low-taxed income for the year; and
(ii) The corporation's global intangible low-taxed income for the
year (if any) is reduced (but not below zero) by the excess of the
corporation's section 250(a)(2) amount over the amount of the reduction
described in paragraph (b)(2)(i) of this section.
(3) Reduction in deduction for taxable years after 2025. For any
taxable year of a domestic corporation beginning after December 31,
2025, paragraph (b)(1) of this section applies by substituting--
(i) 21.875 percent for 37.5 percent in paragraph (b)(1)(i) of this
section; and
(ii) 37.5 percent for 50 percent in paragraph (b)(1)(ii) of this
section.
(4) Treatment under section 4940. For purposes of section
4940(c)(3)(A), a deduction under section 250(a) is not treated as an
ordinary and necessary expense paid or incurred for the production or
collection of gross investment income.
(c) Definitions. The following definitions apply for purposes of
this section.
(1) Domestic corporation. The term domestic corporation has the
meaning set forth in section 7701(a), but does not include a regulated
investment company (as defined in section 851), a real estate
investment trust (as defined in section 856), or an S corporation (as
defined in section 1361).
(2) Foreign-derived intangible income. The term foreign-derived
intangible income has the meaning set forth in Sec. 1.250(b)-1(b).
(3) Global intangible low-taxed income. The term global intangible
low-taxed income means, with respect to a domestic corporation for a
taxable year, the sum of the corporation's GILTI inclusion amount under
Sec. 1.951A-1(c) for the taxable year and the corporation's
distributive share of any U.S. shareholder partnership's GILTI
inclusion amount under Sec. 1.951A-5(b)(2).
(4) Section 250(a)(2) amount. The term section 250(a)(2) amount
means, with respect to a domestic corporation for a taxable year, the
excess (if any) of the sum of the corporation's foreign-derived
intangible income and global intangible low-taxed income (determined
without regard to section 250(a)(2) and paragraph (b)(2) of this
section), over the corporation's taxable income determined with regard
to all items of income, deduction, or loss, except for the deduction
allowed under section 250 and this section. Therefore, for example, a
domestic corporation's taxable income under the previous sentence is
determined taking into account the application of sections 163(j) and
172(a). For a corporation that is subject to the unrelated business
income tax under section 511, taxable income is determined only by
reference to that corporation's unrelated business taxable income
defined under section 512.
(d) Reporting requirement. Each domestic corporation (or individual
making an election under section 962) that claims a deduction under
section 250 for a taxable year must make an annual return on Form 8993,
``Section 250 Deduction for Foreign-Derived Intangible Income (FDII)
and Global Intangible Low-Taxed Income (GILTI)'' (or any successor
form) for such year, setting forth the information, in such form and
manner, as Form 8993 (or any successor form) or its instructions
prescribe. Returns on Form 8993 (or any successor form) for a taxable
year must be filed with the domestic corporation's (or in the case of a
section 962 election, the individual's) income tax return on or before
the due date (taking into account extensions) for filing the
corporation's (or in the case of a section 962 election, the
individual's) income tax return.
(e) Determination of deduction for consolidated groups. A member of
a consolidated group (as defined in Sec. 1.1502-1(h)) determines its
deduction
[[Page 8212]]
under section 250(a) and this section under the rules provided in Sec.
1.1502-50(b).
(f) Examples. The following examples illustrate the application of
this section. For purposes of the examples, it is assumed that DC is a
domestic corporation that is not a member of a consolidated group and
the taxable year of DC begins after 2017 and before 2026.
(1) Example 1: Application of the taxable income limitation--
(i) Facts. For the taxable year, without regard to section 250(a)(2)
and paragraph (b)(2) of this section, DC has foreign-derived
intangible income of $100x and global intangible low-taxed income of
$300x. DC's taxable income (without regard to section 250(a) and
this section) is $300x.
(ii) Analysis. DC has a section 250(a)(2) amount of $100x, which
is equal to the excess of the sum of DC's foreign-derived intangible
income and global intangible low-taxed income of $400x ($100x +
$300x) over its taxable income of $300x. As a result, DC's foreign-
derived intangible income and global intangible low-taxed income are
reduced, in the aggregate, by $100x under section 250(a)(2) and
paragraph (b)(2) of this section for purposes of calculating DC's
deduction allowed under section 250(a)(1) and paragraph (b)(1) of
this section. DC's foreign-derived intangible income is reduced by
$25x, the amount that bears the same ratio to the section 250(a)(2)
amount ($100x) as DC's foreign-derived intangible income ($100x)
bears to the sum of DC's foreign-derived intangible income and
global intangible low-taxed income ($400x). DC's global intangible
low-taxed income is reduced by $75x, which is the remainder of the
section 250(a)(2) amount ($100x-$25x). Therefore, for purposes of
calculating its deduction under section 250(a)(1) and paragraph
(b)(1) of this section, DC's foreign-derived intangible income is
$75x ($100x-$25x) and its global intangible low-taxed income is
$225x ($300x-$75x). Accordingly, DC is allowed a deduction for the
taxable year under section 250(a)(1) and paragraph (b)(1) of this
section of $140.63x ($75x x 0.375 + $225x x 0.50).
(2) Example 2: Interaction of sections 163(j), 172, and 250--
(i) Facts. For the taxable year, DC has gross DEI (as defined in
Sec. 1.250(b)-1(c)(14)) and gross FDDEI (as defined in Sec.
1.250(b)-1(c)(15)) of $300x. DC has no income for the taxable year
other than income included in gross DEI. DC also has a net operating
loss carryover to the taxable year under section 172(b) of $130x and
business interest (as defined in section 163(j)(5), without regard
to any carryforwards described in section 163(j)(2)) of $100x. Under
Sec. 1.250(b)-1(d)(2), all of DC's interest expense is allocable to
gross FDDEI and the net operating loss carryover, to the extent
absorbed in the taxable year, is allocable to gross FDDEI. DC has no
other allowable deductions, qualified business asset investment (as
defined in Sec. 1.250(b)-2(b)), or global intangible low-taxed
income for the taxable year. DC has no floor plan financing interest
(as defined in section 163(j)(9)) for the taxable year and no
business interest income (as defined in section 163(j)(6)) for the
taxable year.
(ii) Analysis--(A) Calculation of tentative section 250
deduction for purposes of section 163(j). First, for purposes of
applying section 163(j), the amount of the deduction allowed to DC
under section 250(a)(1) is determined without regard to the
application of section 163(j) and the section 163(j) regulations,
without regard to section 172, and without regard to section
250(a)(2) and paragraph (b)(2) of this section (tentative section
250 deduction). See Sec. 1.163(j)-1(b)(37)(ii); see also Sec.
1.250(b)-1(d)(2)(ii). Therefore, solely for purposes of calculating
DC's tentative section 250 deduction, DC's allowable deductions
under Sec. 1.250(b)-1(d)(2)(ii) for computing its foreign-derived
intangible income are $100x, the amount of its business interest
before the application of section 163(j). DC's deduction eligible
income (as defined in Sec. 1.250(b)-1(c)(2)) is $200x, the excess
of its gross DEI (as defined in Sec. 1.250(b)-1(c)(14)) of $300x,
over its deductions properly allocable to gross DEI of $100x. DC's
foreign-derived deduction eligible income (as defined in Sec.
1.250(b)-1(c)(12)) is also $200x, the excess of its gross FDDEI of
$300x over its deductions properly allocable to gross FDDEI of
$100x. DC's foreign-derived ratio (as defined in Sec. 1.250(b)-
1(c)(13)) is 100%, which is the ratio of DC's foreign-derived
deduction eligible income of $200x to DC's deduction eligible income
of $200x. DC's deemed intangible income (as defined Sec. 1.250(b)-
1(c)(3)) is $200x, the excess of its deduction eligible income of
$200x over its qualified business asset investment of $0. Therefore,
DC's foreign-derived intangible income for purposes of the tentative
section 250 deduction is $200x, which is equal to DC's deemed
intangible income of $200x multiplied by its foreign-derived ratio
of 100%. Accordingly, DC's tentative section 250 deduction is $75x
($200x x 0.375).
(B) Calculation of disallowance under section 163(j)(1). Second,
the amount of DC's business interest deduction allowed under section
163(j) is determined taking into account the tentative section 250
deduction, but without regard to section 172(a). See section
163(j)(8)(A)(iii). Under section 163(j)(1) and Sec. 1.163(j)-2(b),
DC's deduction for business interest is limited to 30% of adjusted
taxable income plus the amount of any business interest income for the
taxable year and the amount of any floor plan financing interest for
the taxable year. In this case, DC has no business interest income or
floor plan financing interest for the taxable year and therefore DC's
deduction for business interest is limited to 30% of DC's adjusted
taxable income for the taxable year. DC's adjusted taxable income is
equal to DC's taxable income with the relevant adjustments set forth
under section 163(j)(8) and the regulations under section 163(j). For
this purpose, DC's taxable income is computed without regard to DC's
business interest and the amount of any net operating loss deduction
under section 172, but taking into account the tentative section 250
deduction. Taking into account the tentative section 250 deduction,
DC's adjusted taxable income is $225x ($300x--$75x). Therefore, the
amount of DC's allowable deduction for business interest is $67.5x
($225x x 0.30) and the remaining $32.5x of DC's business interest
expense will be carried forward to the succeeding taxable year.
(C) Calculation of net operating loss deduction under section
172(a). Third, the amount of DC's net operating loss deduction under
section 172(a) is determined taking into account section 163(j), but
without regard to section 250(a) and paragraph (b)(1) of this section.
See Sec. 1.250(b)-1(d)(2)(ii). Under section 172(a)(2), the amount of
DC's net operating loss deduction is limited to 80% of taxable income.
Taking into account the allowable deduction for business interest (but
not its deduction allowed under section 250(a)), DC's taxable income is
$232.5x ($300x-$67.5x), and its taxable income limitation under section
172(a)(2) is $186x ($232.5x x 0.80). DC is entitled to a net operating
loss deduction equal to its entire net operating loss carryover of
$130x, because such amount is less than $186x.
(D) Calculation of FDII. Fourth, the amount of DC's foreign-derived
intangible income is determined, taking into account the deductions
allowed after the application of sections 163(j) and 172(a). DC's
allowable deductions under Sec. 1.250(b)-1(d)(2)(ii) for computing its
foreign-derived intangible income are $197.5x, which is equal to its
allowed deduction for business interest of $67.5x plus its net
operating loss deduction of $130x. Accordingly, DC's deduction eligible
income (as defined in Sec. 1.250(b)-1(c)(2)) is $102.5x, the excess of
its gross DEI (as defined in Sec. 1.250(b)-1(c)(14)) of $300x, over
its deductions properly allocable to gross DEI of $197.5x. DC's
foreign-derived deduction eligible income (as defined in Sec.
1.250(b)-1(c)(12)) is also $102.5x, the excess of its gross FDDEI of
$300x, over its deductions properly allocable to gross FDDEI of
$197.5x. DC's foreign-derived ratio (as defined in Sec. 1.250(b)-
1(c)(13)) is 100%, which is the ratio of DC's foreign-derived deduction
eligible income of $102.5x to DC's deduction eligible income of
$102.5x. DC's deemed intangible income (as defined in Sec. 1.250(b)-
1(c)(3)) is $102.5x, the excess of its deduction eligible income of
$102.5x over its qualified business asset investment of $0.
Accordingly, DC's foreign-derived intangible income before application
of section 250(a)(2) and paragraph (b)(2) of this section is
[[Page 8213]]
$102.5x, which is equal to DC's deemed intangible income of $102.5x
multiplied by its foreign-derived ratio of 100%.
(E) Calculation of section 250 deduction. Finally, the amount of
DC's deduction under section 250 is determined after the application of
section 250(a)(2), which is applied taking into account DC's business
interest allowed under section 163(j) and its net operating loss
deduction under section 172(a). DC's taxable income for purposes of
section 250(a)(2) and paragraph (b)(2) of this section is $102.5x,
which is $300x of gross income minus $197.5x, which is equal to its
deduction for business interest of $67.5x plus its net operating loss
deduction of $130x. DC does not have a section 250(a)(2) amount (as
defined in paragraph (c)(4) of this section) for the year because DC's
foreign-derived intangible income of $102.5x, determined without regard
to section 250(a)(2) and paragraph (b)(2) of this section, does not
exceed DC's taxable income of $102.5x. Therefore, the amount of DC's
foreign-derived intangible income is not reduced under section
250(a)(2) and paragraph (b)(2) of this section. Accordingly, for the
taxable year, DC is allowed a deduction under section 250(a)(1) and
paragraph (b)(1) of this section of $38.44x ($102.5x x 0.375).
Sec. 1.250(b)-1 Computation of foreign-derived intangible income
(FDII).
(a) Scope. This section provides rules for computing foreign-
derived intangible income. Paragraph (b) of this section defines
foreign-derived intangible income. Paragraph (c) of this section
provides definitions that are relevant for computing foreign-derived
intangible income. Paragraph (d) of this section provides rules for
computing gross income and allocating and apportioning deductions for
purposes of computing deduction eligible income and foreign-derived
deduction eligible income. Paragraph (e) of this section provides rules
for computing the deduction eligible income and foreign-derived
deduction eligible income of a domestic corporate partner. Paragraph
(f) of this section provides a rule for computing the foreign-derived
intangible income of a member of a consolidated group. Paragraph (g) of
this section provides a rule for computing the foreign-derived
intangible income of a tax-exempt corporation.
(b) Definition of foreign-derived intangible income. Subject to the
provisions of this section, the term foreign-derived intangible income
means, with respect to a domestic corporation for a taxable year, the
corporation's deemed intangible income for the year multiplied by the
corporation's foreign-derived ratio for the year.
(c) Definitions. This paragraph (c) provides definitions that apply
for purposes of this section and Sec. Sec. 1.250(b)-2 through
1.250(b)-6.
(1) Controlled foreign corporation. The term controlled foreign
corporation has the meaning set forth in section 957(a).
(2) Deduction eligible income. The term deduction eligible income
means, with respect to a domestic corporation for a taxable year, the
excess (if any) of the corporation's gross DEI for the year, over the
deductions properly allocable to gross DEI for the year, as determined
under paragraph (d)(2) of this section.
(3) Deemed intangible income. The term deemed intangible income
means, with respect to a domestic corporation for a taxable year, the
excess (if any) of the corporation's deduction eligible income for the
year, over the corporation's deemed tangible income return for the
year.
(4) Deemed tangible income return. The term deemed tangible income
return means, with respect to a domestic corporation and a taxable
year, 10 percent of the corporation's qualified business asset
investment for the year.
(5) Dividend. The term dividend has the meaning set forth in
section 316, and includes any amount treated as a dividend under any
other provision of subtitle A of the Internal Revenue Code or the
regulations thereunder (for example, under section 78, 356(a)(2),
367(b), or 1248).
(6) Domestic corporation. The term domestic corporation has the
meaning set forth in Sec. 1.250(a)-1(c)(1).
(7) Domestic oil and gas extraction income. The term domestic oil
and gas extraction income means income described in section 907(c)(1),
substituting ``within the United States'' for ``without the United
States.''
(8) FDDEI sale. The term FDDEI sale has the meaning set forth in
Sec. 1.250(b)-4(b).
(9) FDDEI service. The term FDDEI service has the meaning set forth
in Sec. 1.250(b)-5(b).
(10) FDDEI transaction. The term FDDEI transaction means a FDDEI
sale or a FDDEI service.
(11) Foreign branch income. The term foreign branch income means
gross income attributable to a foreign branch of a domestic corporation
or a partnership under Sec. 1.904-4(f)(2), except that the term also
includes any income or gain that would not be treated as gross income
attributable to a foreign branch under Sec. 1.904-4(f) but that arises
from the direct or indirect sale (as defined in Sec. 1.250(b)-3(b)(7))
of any asset (other than stock) that produces gross income attributable
to a foreign branch, including by reason of the sale of a disregarded
entity or interest in a partnership. See also Sec. 1.904-4(f)(2)(v)
(providing that if a principal purpose of recording or failing to
record an item of gross income on the books and records of a foreign
branch is the avoidance of the purposes of section 250 (in connection
with section 250(b)(3)(A)(i)(VI)), the item must be attributed to one
or more foreign branches of the foreign branch owner in a manner that
reflects the substance of the transaction).
(12) Foreign-derived deduction eligible income. The term foreign-
derived deduction eligible income means, with respect to a domestic
corporation for a taxable year, the excess (if any) of the
corporation's gross FDDEI for the year, over the deductions properly
allocable to gross FDDEI for the year, as determined under paragraph
(d)(2) of this section.
(13) Foreign-derived ratio. The term foreign-derived ratio means,
with respect to a domestic corporation for a taxable year, the ratio
(not to exceed one) of the corporation's foreign-derived deduction
eligible income for the year to the corporation's deduction eligible
income for the year. If a domestic corporation has no foreign-derived
deduction eligible income for a taxable year, the corporation's
foreign-derived ratio is zero for the year.
(14) Gross DEI. The term gross DEI means, with respect to a
domestic corporation or a partnership for a taxable year, the gross
income of the corporation or partnership for the year determined
without regard to the following items of gross income--
(i) Amounts included in gross income under section 951(a)(1);
(ii) Global intangible low-taxed income (as defined in Sec.
1.250(a)-1(c)(3));
(iii) Financial services income (as defined in section 904(d)(2)(D)
and Sec. 1.904-4(e)(1)(ii));
(iv) Dividends received from a controlled foreign corporation with
respect to which the corporation or partnership is a United States
shareholder;
(v) Domestic oil and gas extraction income; and
(vi) Foreign branch income.
(15) Gross FDDEI. The term gross FDDEI means, with respect to a
domestic corporation or a partnership for a taxable year, the portion
of the gross DEI of the corporation or partnership for the year which
is
[[Page 8214]]
derived from all of its FDDEI transactions.
(16) Gross non-FDDEI. The term gross non-FDDEI means, with respect
to a domestic corporation for a taxable year, the portion of the
corporation's gross DEI that is not included in gross FDDEI.
(17) Modified affiliated group--(i) In general. The term modified
affiliated group means an affiliated group as defined in section
1504(a) determined by substituting ``more than 50 percent'' for ``at
least 80 percent'' each place it appears, and without regard to section
1504(b)(2) and (3).
(ii) Special rule for noncorporate entities. Any person (other than
a corporation) that is controlled by one or more members of a modified
affiliated group (including one or more persons treated as a member or
members of a modified affiliated group by reason of this paragraph
(c)(17)(ii)) or that controls any such member is treated as a member of
the modified affiliated group.
(iii) Definition of control. For purposes of paragraph (c)(17)(ii)
of this section, the term control has the meaning set forth in section
954(d)(3).
(18) Qualified business asset investment. The term qualified
business asset investment has the meaning set forth in Sec. 1.250(b)-
2(b).
(19) Related party. The term related party means, with respect to
any person, any member of a modified affiliated group that includes
such person.
(20) United States shareholder. The term United States shareholder
has the meaning set forth in section 951(b) and Sec. 1.951-1(g).
(d) Treatment of cost of goods sold and allocation and
apportionment of deductions--(1) Cost of goods sold for determining
gross DEI and gross FDDEI. For purposes of determining the gross income
included in gross DEI and gross FDDEI of a domestic corporation or a
partnership, the cost of goods sold of the corporation or partnership
is attributed to gross receipts with respect to gross DEI or gross
FDDEI under any reasonable method. Cost of goods sold must be
attributed to gross receipts with respect to gross DEI or gross FDDEI
regardless of whether certain costs included in cost of goods sold can
be associated with activities undertaken in an earlier taxable year
(including a year before the effective date of section 250). A domestic
corporation or partnership may not segregate cost of goods sold with
respect to a particular product into component costs and attribute
those component costs disproportionately to gross receipts with respect
to amounts excluded from gross DEI or gross FDDEI, as applicable.
(2) Deductions properly allocable to gross DEI and gross FDDEI--(i)
In general. For purposes of determining a domestic corporation's
deductions that are properly allocable to gross DEI and gross FDDEI,
the corporation's deductions are allocated and apportioned to gross DEI
and gross FDDEI under the rules of Sec. Sec. 1.861-8 through 1.861-14T
and 1.861-17 by treating section 250(b) as an operative section
described in Sec. 1.861-8(f). In allocating and apportioning
deductions under Sec. Sec. 1.861-8 through 1.861-14T and 1.861-17,
gross FDDEI and gross non-FDDEI are treated as separate statutory
groupings. The deductions allocated and apportioned to gross DEI equal
the sum of the deductions allocated and apportioned to gross FDDEI and
gross non-FDDEI. All items of gross income described in paragraphs
(c)(14)(i) through (vi) of this section are in the residual grouping.
For purposes of this paragraph (d)(2)(i), research and experimental
expenditures are allocated and apportioned in accordance with Sec.
1.861-17 without taking into account the exclusive apportionment rule
of Sec. 1.861-17(b).
(ii) Determination of deductions to allocate. All deductions
allowed to a domestic corporation are allocated and apportioned to
gross DEI and gross FDDEI for a taxable year under paragraph (d)(2)(i)
of this section, other than the deduction allowed under section 250(a)
and Sec. 1.250(a)-1(b). For this purpose, the amount of the net
operating loss deduction under section 172(a) is determined without
regard to section 250. See also Sec. 1.163(j)-1(b)(37)(ii) (for
purposes of determining the limitation under section 163(j)(1), the
deduction under section 250(a)(1) is determined without regard to the
application of section 163(j) and the section 163(j) regulations and
without regard to the taxable income limitation of section 250(a)(2)
and Sec. 1.250(a)-1(b)(2)).
(3) Examples. The following example illustrates the application of
this paragraph (d).
(i) Presumed facts. The following facts are assumed for purposes of
the examples--
(A) DC is a domestic corporation that is not a member of a
consolidated group.
(B) All sales and services are provided to persons that are not
related parties.
(C) All sales and services to foreign persons qualify as FDDEI
transactions.
(ii) Examples.
(A) Example 1: Allocation of deductions--(1) Facts.
For a taxable year, DC manufactures products A and B in the
United States. DC sells products A and B and provides services
associated with products A and B to United States and foreign
persons. DC`s qualified business asset investment for the taxable
year is $1,000x. DC has $300x of deductible interest expense allowed
under section 163. DC has assets with a tax book value of $2,500x.
The tax book value of DC's assets used to produce products A and B
and services is split evenly between assets that produce gross FDDEI
and assets that produce gross non-FDDEI. DC has $840x of supportive
deductions, as defined in Sec. 1.861-8(b)(3), attributable to
general and administrative expenses incurred for the purpose of
generating the class of gross income that consists of gross DEI. DC
apportions the $840x of deductions on the basis of gross income in
accordance with Sec. 1.861-8T(c)(1). For purposes of determining
gross FDDEI and gross DEI under paragraph (d)(1) of this section, DC
attributes $200x of cost of goods sold to Product A and $400x of
cost of goods sold to Product B, and then attributes the cost of
goods sold for each product ratably between the gross receipts of
such product sold to foreign persons and the gross receipts of such
product sold to United States persons. The manner in which DC
attributes the cost of goods sold is a reasonable method. DC has no
other items of income, loss, or deduction. For the taxable year, DC
has the following income tax items relevant to the determination of
its foreign-derived intangible income:
Table 1 to Paragraph (d)(3)(ii)(A)(1)
----------------------------------------------------------------------------------------------------------------
Product A Product B Services Total
----------------------------------------------------------------------------------------------------------------
Gross receipts from U.S. persons................ $200x $800x $100x $1,100x
Gross receipts from foreign persons............. 200x 800x 100x 1,100x
Total gross receipts............................ 400x 1,600x 200x 2,200x
Cost of goods sold for gross receipts from U.S. 100x 200x 0 300x
persons........................................
Cost of goods sold for gross receipts from 100x 200x 0 300x
foreign persons................................
Total cost of goods sold........................ 200x 400x 0 600x
Gross income.................................... 200x 1,200x 200x 1,600x
[[Page 8215]]
Tax book value of assets used to produce 500x 500x 1,500x 2,500x
products/services..............................
----------------------------------------------------------------------------------------------------------------
(2) Analysis--(i) Determination of gross FDDEI and gross non-
FDDEI. Because DC does not have any income described in section
250(b)(3)(A)(i)(I) through (VI) and paragraphs (c)(14)(i) through
(vi) of this section, none of its gross income is excluded from
gross DEI. DC's gross DEI is $1,600x ($2,200x total gross receipts
less $600x total cost of goods sold). DC's gross FDDEI is $800x
($1,100x of gross receipts from foreign persons minus attributable
cost of goods sold of $300x).
(ii) Determination of foreign-derived deduction eligible income.
To calculate its foreign-derived deduction eligible income, DC must
determine the amount of its deductions that are allocated and
apportioned to gross FDDEI and then subtract those amounts from
gross FDDEI. DC's interest deduction of $300x is allocated and
apportioned to gross FDDEI on the basis of the average total value
of DC's assets in each grouping. DC has assets with a tax book value
of $2,500x split evenly between assets that produce gross FDDEI and
assets that produce gross non-FDDEI. Accordingly, an interest
expense deduction of $150x is apportioned to DC's gross FDDEI. With
respect to DC's supportive deductions of $840x that are related to
DC's gross DEI, DC apportions such deductions between gross FDDEI
and gross non-FDDEI on the basis of gross income. Accordingly,
supportive deductions of $420x are apportioned to DC's gross FDDEI.
Thus, DC's foreign-derived deduction eligible income is $230x, which
is equal to its gross FDDEI of $800x less $150x of interest expense
deduction and $420x of supportive deductions.
(iii) Determination of deemed intangible income. DC's deemed
tangible income return is $100x, which is equal to 10% of its
qualified business asset investment of $1,000x. DC's deduction
eligible income is $460x, which is equal to its gross DEI of $1,600x
less $300x of interest expense deductions and $840x of supportive
deductions. Therefore, DC's deemed intangible income is $360x, which
is equal to the excess of its deduction eligible income of $460x
over its deemed tangible income return of $100x.
(iv) Determination of foreign-derived intangible income. DC's
foreign-derived ratio is 50%, which is the ratio of DC's foreign-
derived deduction eligible income of $230x to DC's deduction
eligible income of $460x. Therefore, DC's foreign-derived intangible
income is $180x, which is equal to DC's deemed intangible income of
$360x multiplied by its foreign-derived ratio of 50%.
(B) Example 2: Allocation of deductions with respect to a
partnership--(1) Facts--(i) DC's operations. DC is engaged in the
production and sale of products consisting of two separate product
groups in three-digit Standard Industrial Classification (SIC)
Industry Groups, hereafter referred to as Group AAA and Group BBB.
All of the gross income of DC is included in gross DEI. DC incurs
$250x of research and experimental (R&E) expenditures in the United
States that are deductible under section 174. None of the R&E is
legally mandated as described in Sec. 1.861-17(a)(4) and none is
included in cost of goods sold. For purposes of determining gross
FDDEI and gross DEI under paragraph (d)(1) of this section, DC
attributes $210x of cost of goods sold to Group AAA products and
$900x of cost of goods sold to Group BBB products, and then
attributes the cost of goods sold with respect to each such product
group ratably between the gross receipts with respect to such
product group sold to foreign persons and the gross receipts with
respect to such product group not sold to foreign persons. The
manner in which DC attributes the cost of goods sold is a reasonable
method. For the taxable year, DC has the following income tax items
relevant to the determination of its foreign-derived intangible
income:
Table 2 to (d)(3)(ii)(B)(1)(i)
----------------------------------------------------------------------------------------------------------------
Group AAA Group BBB
products products Total
----------------------------------------------------------------------------------------------------------------
Gross receipts from U.S. persons................................ $200x $800x $1,000x
Gross receipts from foreign persons............................. 100x 400x 500x
Total gross receipts............................................ 300x 1,200x 1,500x
Cost of goods sold for gross receipts from U.S. persons......... 140x 600x 750x
Cost of goods sold for gross receipts from foreign persons...... 70x 300x 370x
Total cost of goods sold........................................ 210x 900x 1,110x
Gross income.................................................... 90x 300x 390x
R&E deductions.................................................. 40x 210x 250x
----------------------------------------------------------------------------------------------------------------
(ii) PRS's operations. In addition to its own operations, DC is
a partner in PRS, a partnership that also produces products
described in SIC Group AAA. DC is allocated 50% of all income, gain,
loss, and deductions of PRS. During the taxable year, PRS sells
Group AAA products solely to foreign persons, and all of its gross
income is included in gross DEI. PRS has $400 of gross receipts from
sales of Group AAA products for the taxable year and incurs $100x of
research and experimental (R&E) expenditures in the United States
that are deductible under section 174. None of the R&E is legally
mandated as described in Sec. 1.861-17(a)(4) and none is included
in cost of goods sold. For purposes of determining gross FDDEI and
gross DEI under paragraph (d)(1) of this section, PRS attributes
$200x of cost of goods sold to Group AAA products, and then
attributes the cost of goods sold with respect to such product group
ratably between the gross receipts with respect to such product
group sold to foreign persons and the gross receipts with respect to
such product group not sold to foreign persons. The manner in which
PRS attributes the cost of goods sold is a reasonable method. DC's
distributive share of PRS taxable items is $100x of gross income and
$50x of R&E deductions, and DC's share of PRS's gross receipts from
sales of Group AAA products for the taxable year is $200x under
Sec. 1.861-17(f)(3).
(iii) Election to use sales method to allocate and apportion
R&E. DC has elected to use the sales method to apportion its R&E
deductions under Sec. 1.861-17. Neither DC nor PRS licenses or
sells its intangible property to controlled or uncontrolled
corporations in a manner that necessitates including the sales by
such corporations for purposes of apportioning DC's R&E deductions.
(2) Analysis--(i) Determination of gross DEI and gross FDDEI.
Under paragraph (e)(1) of this section, DC's gross DEI, gross FDDEI,
and deductions allocable to those amounts include its distributive
share of gross DEI, gross FDDEI, and deductions of PRS. Thus, DC's
gross DEI for the year is $490x ($390x attributable to DC and $100x
attributable to DC's interest in PRS). DC's gross income from sales
of Group AAA products to foreign persons is $30x ($100x of gross
receipts minus attributable cost of goods sold of $70x). DC's gross
income from sales of Group BBB products to foreign persons is $100x
($400x of gross receipts minus attributable cost of goods sold of
$300x). DC's gross FDDEI for the year is $230x ($30x from DC's
[[Page 8216]]
sale of Group AAA products plus $100x from DC's sale of Group BBB
products plus DC's distributive of PRS's gross FDDEI of $100x).
(ii) Allocation and apportionment of R&E deductions. To
determine foreign-derived deduction eligible income, DC must
allocate and apportion its R&E expense of $300x ($250x incurred
directly by DC and $50x incurred indirectly through DC's interest in
PRS). In accordance with Sec. 1.861-17, R&E expenses are first
allocated to a class of gross income related to a three-digit SIC
group code. DC's R&E expenses related to products in Group AAA are
$90x ($40x incurred directly by DC and $50x incurred indirectly
through DC's interest in PRS) and its expenses related to Group BBB
are $210x. None of those expenses were legally mandated by a
particular country and therefore do not require the allocation of
R&E expense solely to income arising from that jurisdiction. The
exclusive apportionment rule in Sec. 1.861-17(b) does not apply for
purposes of apportioning R&E to gross DEI and gross FDDEI. See
paragraph (d)(2)(i) of this section. Accordingly, all R&E expense
attributable to a particular SIC group code is apportioned on the
basis of the amounts of sales within that SIC group code. Total
sales within Group AAA were $500x ($300x directly by DC and $200x
attributable to DC's interest in PRS), $300x of which were made to
foreign persons ($100x directly by DC and $200x attributable to DC's
interest in PRS). Therefore, the $90x of R&E expense related to
Group AAA is apportioned $54x to gross FDDEI ($90x x $300x/$500x)
and $36x to gross non-FDDEI ($90x x $200x/$500x). Total sales within
Group BBB were $1,200x, $400x of which were made to foreign persons.
Therefore, the $210x of R&E expense related to products in Group BBB
is apportioned $70x to gross FDDEI ($210x x $400x/$1,200x) and $140x
to gross non-FDDEI ($210x x $800x/$1,200x). Accordingly, DC's
foreign-derived deduction eligible income for the tax year is $106x
($230x gross FDDEI minus $124x of R&E ($54x + $70x) allocated and
apportioned to gross FDDEI).
(e) Domestic corporate partners--(1) In general. A domestic
corporation's deduction eligible income and foreign-derived deduction
eligible income for a taxable year are determined taking into account
the corporation's share of gross DEI, gross FDDEI, and deductions of
any partnership (whether domestic or foreign) in which the corporation
is a direct or indirect partner. For purposes of the preceding
sentence, a domestic corporation's share of each such item of a
partnership is determined in accordance with the corporation's
distributive share of the underlying items of income, gain, deduction,
and loss of the partnership that comprise such amounts. See Sec.
1.250(b)-2(g) for rules calculating the increase to a domestic
corporation's qualified business asset investment by the corporation's
share of partnership QBAI.
(2) Reporting requirement for partnership with domestic corporate
partners. A partnership that has one or more direct or indirect
partners that are domestic corporations and that is required to file a
return under section 6031 must furnish to each such partner on or with
such partner's Schedule K-1 (Form 1065 or any successor form) by the
due date (including extensions) for furnishing Schedule K-1 the
partner's share of the partnership's gross DEI, gross FDDEI, deductions
that are definitely related to the partnership's gross DEI and gross
FDDEI, and partnership QBAI (as determined under Sec. 1.250(b)-2(g))
for each taxable year in which the partnership has gross DEI, gross
FDDEI, deductions that are definitely related to the partnership's
gross DEI or gross FDDEI, or partnership specified tangible property
(as defined in Sec. 1.250(b)-2(g)(2)(iii)).
(3) Examples. The following examples illustrate the application of
this paragraph (e).
(i) Presumed facts. The following facts are assumed for purposes of
the examples--
(A) DC, a domestic corporation, is a partner in PRS, a partnership.
(B) FP and FP2 are foreign persons.
(C) FC is a foreign corporation.
(D) The allocations under PRS's partnership agreement satisfy the
requirements of section 704.
(E) No partner of PRS is a related party of DC.
(F) DC, PRS, and FC all use the calendar year as their taxable
year.
(G) PRS has no items of income, loss, or deduction for its taxable
year, except the items of income described.
(ii) Examples.
(A) Example 1: Sale by partnership to foreign person--(1)
Facts. Under the terms of the partnership agreement, DC is allocated
50% of all income, gain, loss, and deductions of PRS. For the
taxable year, PRS recognizes $20x of gross income on the sale of
general property (as defined in Sec. 1.250(b)-3(b)(3)) to FP, a
foreign person (as determined under Sec. 1.250(b)-4(c)), for a
foreign use (as determined under Sec. 1.250(b)-4(d)). The gross
income recognized on the sale of property is not described in
section 250(b)(3)(A)(I) through (VI) or paragraphs (c)(14)(i)
through (vi) of this section.
(2) Analysis. PRS's sale of property to FP is a FDDEI sale as
described in Sec. 1.250(b)-4(b). Therefore, the gross income
derived from the sale ($20x) is included in PRS's gross DEI and
gross FDDEI, and DC's share of PRS's gross DEI and gross FDDEI
($10x) is included in DC's gross DEI and gross FDDEI for the taxable
year.
(B) Example 2: Sale by partnership to foreign person
attributable to foreign branch--(1) Facts. The facts are the same as
in paragraph (e)(3)(ii)(A)(1) of this section (the facts in Example
1), except the income from the sale of property to FP is
attributable to a foreign branch of PRS.
(2) Analysis. PRS's sale of property to FP is excluded from
PRS's gross DEI under section 250(b)(3)(A)(VI) and paragraph
(c)(14)(vi) of this section. Accordingly, DC's share of PRS's gross
income of $10x from the sale is not included in DC's gross DEI or
gross FDDEI for the taxable year.
(C) Example 3: Partnership with a loss in gross FDDEI--(1)
Facts. The facts are the same as in paragraph (e)(3)(ii)(A)(1) of
this section (the facts in Example 1), except that in the same
taxable year, PRS also sells property to FP2, a foreign person (as
determined under Sec. 1.250(b)-4(c)), for a foreign use (as
determined under Sec. 1.250(b)-4(d)). After taking into account
both sales, PRS has a gross loss of $30x.
(2) Analysis. Both the sale of property to FP and the sale of
property to FP2 are FDDEI sales because each sale is described in
Sec. 1.250(b)-4(b). DC's share of PRS's gross loss ($15x) from the
sales is included in DC's gross DEI and gross FDDEI.
(D) Example 4: Sale by partnership to foreign related party of
the partnership--(1) Facts. Under the terms of the partnership
agreement, DC has 25% of the capital and profits interest in the
partnership and is allocated 25% of all income, gain, loss, and
deductions of PRS. PRS owns 100% of the single class of stock of FC.
In the taxable year, PRS has $20x of gain on the sale of general
property (as defined in Sec. 1.250(b)-3(b)(3)) to FC, and FC makes
a material physical change to the property within the meaning of
Sec. 1.250(b)-4(d)(2)(iii) outside the United States before selling
the property to customers in the United States. PRS satisfies the
documentation requirement of Sec. 1.250(b)-4(d)(3) with respect to
the sale.
(2) Analysis. The sale of property by PRS to FC is described in
Sec. 1.250(b)-4(b) without regard to the application of Sec.
1.250(b)-6, since the sale is to a foreign person (as determined
under Sec. 1.250(b)-4(c)) for a foreign use (as determined under
Sec. 1.250(b)-4(d)). However, FC is a foreign related party of PRS
within the meaning of section 250(b)(5)(D) and Sec. 1.250(b)-
6(b)(1), because FC and PRS are members of a modified affiliated
group within the meaning of paragraph (c)(17) of this section.
Therefore, the sale by PRS to FC is a related party sale within the
meaning of Sec. 1.250(b)-6(b)(3). Under section 250(b)(5)(C)(i) and
Sec. 1.250(b)-6(c), because FC did not sell the property, or use
the property in connection with other property sold or the provision
of a service, to a foreign unrelated party before the property was
subject to a domestic use, the sale by PRS to FC is not a FDDEI
sale. See Sec. 1.250(b)-6(c)(1). Accordingly, the gain from the
sale ($20x) is included in PRS's gross DEI but not its gross FDDEI,
and DC's share of PRS's gain ($5x) is included in DC's gross DEI but
not gross FDDEI. This is the result notwithstanding that FC is not a
related party of DC because FC and DC are not members of a modified
affiliated group within the meaning of paragraph (c)(17) of this
section.
(f) Determination of foreign-derived intangible income for
consolidated groups. A member of a consolidated group (as defined in
Sec. 1.1502-1(h))
[[Page 8217]]
determines its foreign-derived intangible income under the rules
provided in Sec. 1.1502-50.
(g) Determination of foreign-derived intangible income for tax-
exempt corporations. The foreign-derived intangible income of a
corporation that is subject to the unrelated business income tax under
section 511 is determined only by reference to that corporation's items
of income, gain, deduction, or loss, and adjusted bases in property,
that are taken into account in computing the corporation's unrelated
business taxable income (as defined in section 512). For example, if a
corporation that is subject to the unrelated business income tax under
section 511 has tangible property used in the production of both
unrelated business income and gross income that is not unrelated
business income, only the portion of the basis of such property taken
into account in computing the corporation's unrelated business taxable
income is taken into account in determining the corporation's qualified
business asset investment. Similarly, if a corporation that is subject
to the unrelated business income tax under section 511 has tangible
property that is used in both the production of gross DEI and the
production of gross income that is not gross DEI, only the
corporation's unrelated business income is taken into account in
determining the corporation's dual use ratio with respect to such
property under Sec. 1.250(b)-2(d)(2).
Sec. 1.250(b)-2 Qualified business asset investment.
(a) Scope. This section provides general rules for determining the
qualified business asset investment of a domestic corporation for
purposes of determining its deemed tangible income return under Sec.
1.250(b)-1(c)(4). Paragraph (b) of this section defines qualified
business asset investment. Paragraph (c) of this section defines
tangible property and specified tangible property. Paragraph (d) of
this section provides rules for determining the portion of property
that is specified tangible property when the property is used in the
production of both gross DEI and gross income that is not gross DEI.
Paragraph (e) of this section provides rules for determining the
adjusted basis of specified tangible property. Paragraph (f) of this
section provides rules for determining qualified business asset
investment of a domestic corporation with a short taxable year.
Paragraph (g) of this section provides rules for increasing the
qualified business asset investment of a domestic corporation by reason
of property owned through a partnership. Paragraph (h) of this section
provides an anti-avoidance rule that disregards certain transfers when
determining the qualified business asset investment of a domestic
corporation.
(b) Definition of qualified business asset investment. The term
qualified business asset investment means the average of a domestic
corporation's aggregate adjusted bases as of the close of each quarter
of a domestic corporation's taxable year in specified tangible property
that is used in a trade or business of the domestic corporation and is
of a type with respect to which a deduction is allowable under section
167. See paragraph (f) of this section for rules relating to the
qualified business asset investment of a domestic corporation with a
short taxable year.
(c) Specified tangible property--(1) In general. The term specified
tangible property means, subject to paragraph (d) of this section,
tangible property used in the production of gross DEI.
(2) Tangible property. For purposes of paragraph (c)(1) of this
section, the term tangible property means property for which the
depreciation deduction provided by section 167(a) is eligible to be
determined under section 168 without regard to section 168(f)(1), (2),
or (5) and the date placed in service.
(d) Dual use property--(1) In general. In the case of tangible
property (as defined in paragraph (c)(2) of this section) of a domestic
corporation that is used in both the production of gross DEI and the
production of gross income that is not gross DEI in a domestic
corporation's taxable year, the portion of the adjusted basis in the
property treated as adjusted basis in specified tangible property for
the domestic corporation's taxable year is determined by multiplying
the average of the domestic corporation's adjusted basis in the
property by the dual use ratio with respect to the property for the
domestic corporation's taxable year.
(2) Dual use ratio. The term dual use ratio means, with respect to
specified tangible property--
(i) In the case of specified tangible property that produces
directly identifiable income for a domestic corporation's taxable year,
the ratio of the gross DEI produced by the property for the taxable
year to the total amount of gross income produced by the property for
the taxable year.
(ii) In the case of specified tangible property that does not
produce directly identifiable income for a domestic corporation's
taxable year, the ratio of the gross DEI of the domestic corporation
for the taxable year to the total amount of gross income of the
domestic corporation for the taxable year.
(3) Example. The following example illustrates the application
of this paragraph (d).
(i) Facts. DC, a domestic corporation, owns a machine that
produces both gross DEI and domestic oil and gas extraction income.
For the taxable year, the machine produces gross DEI of $750x and
domestic oil and gas extraction income of $250x. The average
adjusted basis of the machine for the taxable year in the hands of
DC is $4,000x. DC also owns an office building for its
administrative functions with an average adjusted basis for the
taxable year of $10,000x. The office building does not produce
directly identifiable income. DC has no other specified tangible
property. For the taxable year, DC's gross DEI is $2,000x and its
gross income is $5,000x.
(ii) Analysis. The machine and office building are both property
for which the depreciation deduction provided by section 167(a) are
eligible to be determined under section 168. Therefore, under
paragraph (c)(2) of this section, the machine and office building
are tangible property. The machine and office building are used in
both the production of gross income that is included in gross DEI
and gross income that is not included in gross DEI, because domestic
oil and gas extraction income is an item of gross income excluded
from gross DEI under section 250(b)(3)(A)(i)(V) and Sec. 1.250(b)-
1(c)(14)(v). Therefore, under paragraph (d)(1) of this section, the
portion of the basis in the machine treated as basis in specified
tangible property is equal to DC's average basis in the machine for
the year ($4,000x), multiplied by the dual use ratio under paragraph
(d)(2)(i) of this section (0.75), which is the proportion that the
gross DEI produced by the property ($750x) bears to the total gross
income produced with respect to the property ($1,000x). Accordingly,
$3,000x ($4,000x x 0.75) of DC's adjusted basis in the machine is
taken into account in determining DC's qualified business asset
investment. Under paragraph (d)(1) of this section, the portion of
the basis in the office building treated as basis in specified
tangible property is equal to DC's average basis in the office
building for the year ($10,000x), multiplied by the dual use ratio
under paragraph (d)(2)(ii) of this section (0.40), which is the
ratio of DC's gross DEI for the taxable year ($2,000x) to DC's total
gross income for the taxable year ($5,000x). Accordingly, $4,000x
($10,000x x 0.40) of DC's adjusted basis in the office building is
taken into account in determining DC's qualified business asset
investment under paragraph (b) of this section. Accordingly, DC's
total qualified business asset investment is $7,000x ($3,000x +
$4,000x).
(e) Determination of adjusted basis of specified tangible
property--(1) In general. The adjusted basis in specified tangible
property is determined by using the alternative depreciation system
under section 168(g), and by allocating the depreciation deduction with
respect to such property for the domestic
[[Page 8218]]
corporation's taxable year ratably to each day during the period in the
taxable year to which such depreciation relates.
(2) Effect of change in law. The determination of adjusted basis
for purposes of paragraph (b) of this section is made without regard to
any provision of law enacted after December 22, 2017, unless such later
enacted law specifically and directly amends the definition of
qualified business asset investment under section 250 or section 951A.
(3) Specified tangible property placed in service before enactment
of section 250. The adjusted basis in property placed in service before
December 22, 2017, is determined using the alternative depreciation
system under section 168(g), as if this system had applied from the
date that the property was placed in service.
(f) Special rules for short taxable years--(1) In general. In the
case of a domestic corporation that has a taxable year that is less
than twelve months (a short taxable year), the rules for determining
the qualified business asset investment of the domestic corporation
under this section are modified as provided in paragraphs (f)(2) and
(3) of this section with respect to the taxable year.
(2) Determination of quarter closes. For purposes of determining
quarter closes, in computing the qualified business asset investment of
a domestic corporation for a short taxable year, the quarters of the
domestic corporation for purposes of this section are the full quarters
beginning and ending within the short taxable year (if any),
determining quarter length as if the domestic corporation did not have
a short taxable year, plus one or more short quarters (if any).
(3) Reduction of qualified business asset investment. The qualified
business asset investment of a domestic corporation for a short taxable
year is the sum of--
(i) The sum of the domestic corporation's aggregate adjusted bases
in specified tangible property as of the close of each full quarter (if
any) in the domestic corporation's taxable year divided by four; plus
(ii) The domestic corporation's aggregate adjusted bases in
specified tangible property as of the close of each short quarter (if
any) in the domestic corporation's taxable year multiplied by the sum
of the number of days in each short quarter divided by 365.
(4) Example. The following example illustrates the application
of this paragraph (f).
(i) Facts. A, an individual, owns all of the stock of DC, a
domestic corporation. A owns DC from the beginning of the taxable
year. On July 15 of the taxable year, A sells DC to USP, a domestic
corporation that is unrelated to A. DC becomes a member of the
consolidated group of which USP is the common parent and as a
result, under Sec. 1.1502-76(b)(2)(ii), DC's taxable year is
treated as ending on July 15. USP and DC both use the calendar year
as their taxable year. DC's aggregate adjusted bases in specified
tangible property for the taxable year are $250x as of March 31,
$300x as of June 30, $275x as of July 15, $500x as of September 30,
and $450x as of December 31.
(ii) Analysis--(A) Determination of short taxable years and
quarters. DC has two short taxable years during the taxable year.
The first short taxable year is from January 1 to July 15, with two
full quarters (January 1-March 31 and April 1-June 30) and one short
quarter (July 1-July 15). The second taxable year is from July 16 to
December 31, with one short quarter (July 16-September 30) and one
full quarter (October 1-December 31).
(B) Calculation of qualified business asset investment for the
first short taxable year. Under paragraph (f)(2) of this section, for
the first short taxable year, DC has three quarter closes (March 31,
June 30, and July 15). Under paragraph (f)(3) of this section, the
qualified business asset investment of DC for the first short taxable
year is $148.80x, the sum of $137.50x (($250x + $300x)/4) attributable
to the two full quarters and $11.30x ($275x x 15/365) attributable to
the short quarter.
(C) Calculation of qualified business asset investment for the
second short taxable year. Under paragraph (f)(2) of this section, for
the second short taxable year, DC has two quarter closes (September 30
and December 31). Under paragraph (f)(3) of this section, the qualified
business asset investment of DC for the second short taxable year is
$217.98x, the sum of $112.50x ($450x/4) attributable to the one full
quarter and $105.48x ($500x x 77/365) attributable to the short
quarter.
(g) Partnership property--(1) In general. For purposes of paragraph
(b) of this section, if a domestic corporation holds an interest in one
or more partnerships as of the close of the domestic corporation's
taxable year, the qualified business asset investment of the domestic
corporation for its taxable year is increased by the sum of the
domestic corporation's partnership QBAI with respect to each
partnership for the domestic corporation's taxable year.
(2) Definitions related to partnership QBAI--(i) In general. The
term partnership QBAI means the sum of the domestic corporation's share
of the partnership's adjusted basis in partnership specified tangible
property as of the close of a partnership taxable year that ends with
or within a domestic corporation's taxable year. A domestic
corporation's share of the partnership's adjusted basis in partnership
specified tangible property is determined separately with respect to
each partnership specified tangible property of the partnership by
multiplying the partnership's adjusted basis in the property by the
partnership QBAI ratio with respect to the property. If the
partnership's taxable year is less than twelve months, the principles
of paragraph (f) of this section apply in determining a domestic
corporation's partnership QBAI with respect to the partnership.
(ii) Partnership QBAI ratio. The term partnership QBAI ratio means,
with respect to partnership specified tangible property--
(A) In the case of partnership specified tangible property that
produces directly identifiable income for a partnership taxable year,
the ratio of the domestic corporation's distributive share of the gross
income produced by the property for the partnership taxable year that
is included in the gross DEI of the domestic corporation for its
taxable year to the total gross income produced by the property for the
partnership taxable year.
(B) In the case of partnership specified tangible property that
does not produce directly identifiable income for a partnership taxable
year, the ratio of the domestic corporation's distributive share of the
gross income of the partnership for the partnership taxable year that
is included in the gross DEI of the domestic corporation for its
taxable year to the total amount of gross income of the partnership for
the partnership taxable year.
(iii) Partnership specified tangible property. The term partnership
specified tangible property means tangible property (as defined in
paragraph (c)(2) of this section) of a partnership that is--
(A) Used in the trade or business of the partnership;
(B) Of a type with respect to which a deduction is allowable under
section 167; and
(C) Used in the production of gross DEI.
(3) Determination of adjusted basis. For purposes of this paragraph
(g), a partnership's adjusted basis in partnership specified tangible
property is determined based on the average of the partnership's
adjusted basis in the property as of the close of each quarter in the
partnership taxable year. The principles of paragraphs (e) and (h) of
this section apply for purposes of
[[Page 8219]]
determining a partnership's adjusted basis in partnership specified
tangible property and the portion of such adjusted basis taken into
account in determining a domestic corporation's partnership QBAI.
(4) Example. The following example illustrates the rules of
this paragraph (g).
(i) Facts. DC, a domestic corporation, is a partner in PRS. Both
DC and PRS use the calendar year as their taxable year. PRS owns two
assets, Asset A and Asset B, both of which are tangible property
used in PRS's trade or business that it depreciates under section
168. Asset A and Asset B are used solely in the production of gross
DEI. The average of PRS's adjusted basis as of the close of each
quarter of PRS's taxable year in Asset A is $100x, and the average
of PRS's adjusted basis as of the close of each quarter of PRS's
taxable year in Asset B is $50x. Asset A produces $10x of directly
identifiable gross income for the taxable year, and Asset B produces
$50x of directly identifiable gross income for the taxable year.
DC's distributive share of the gross income from Asset A is $8x and
its distributive share of the gross income from Asset B is $10x.
DC's entire distributive share of income from Asset A and Asset B is
included in DC's gross DEI for the taxable year. See Sec. 1.250(b)-
1(e)(1). DC's distributive share satisfies the requirements of
section 704(b).
(ii) Analysis. Each of Asset A and Asset B is partnership
specified tangible property because each is tangible property, of a
type with respect to which a deduction is allowable under section
167, used in PRS's trade or business, and used in the production of
gross DEI. DC's partnership QBAI ratio for Asset A is 80%, the ratio
of DC's distributive share of the gross income from Asset A for the
taxable year that is included in DC's gross DEI ($8x) to the total
gross income produced by Asset A for the taxable year ($10x). DC's
partnership QBAI ratio for Asset B is 20%, the ratio of DC's
distributive share of the gross income from Asset B for the taxable
year that is included in DC's gross DEI ($10x) to the total gross
income produced by Asset B for the taxable year ($50x). DC's share
of the average of PRS's adjusted basis of Asset A is $80x, PRS's
adjusted basis in Asset A of $100x multiplied by DC's partnership
QBAI ratio for Asset A of 80%. DC's share of the average of PRS's
adjusted basis of Asset B is $10x, PRS's adjusted basis in Asset B
of $50x multiplied by DC's partnership QBAI ratio for Asset B of
20%. Therefore, DC's partnership QBAI with respect to PRS is $90x
($80x + $10x). Accordingly, under paragraph (g)(1) of this section,
DC increases its qualified business asset investment for the taxable
year by $90x.
(h) Anti-avoidance rule for certain transfers of property--(1) In
general. If, with a principal purpose of decreasing the amount of its
deemed tangible income return, a domestic corporation transfers
specified tangible property (transferred property) to a specified
related party of the domestic corporation and, within the disqualified
period, the domestic corporation or an FDII-eligible related party of
the domestic corporation leases the same or substantially similar
property from any specified related party, then, solely for purposes of
determining the qualified business asset investment of the domestic
corporation under paragraph (b) of this section, the domestic
corporation is treated as owning the transferred property from the
later of the beginning of the term of the lease or date of the transfer
of the property until the earlier of the end of the term of the lease
or the end of the recovery period of the property.
(2) Rule for structured arrangements. For purposes of paragraph
(h)(1) of this section, a transfer of specified tangible property to a
person that is not a related party or lease of property from a person
that is not a related party is treated as a transfer to or lease from a
specified related party if the transfer or lease is pursuant to a
structured arrangement. A structured arrangement exists only if either
paragraph (h)(2)(i) or (ii) of this section is satisfied.
(i) The reduction in the domestic corporation's deemed tangible
income return is a material factor in the pricing of the arrangement
with the transferee.
(ii) Based on all the facts and circumstances, the reduction in the
domestic corporation's deemed tangible income return is a principal
purpose of the arrangement. Facts and circumstances that indicate the
reduction in the domestic corporation's deemed tangible income return
is a principal purpose of the arrangement include--
(A) Marketing the arrangement as tax-advantaged where some or all
of the tax advantage derives from the reduction in the domestic
corporation's deemed tangible income return;
(B) Primarily marketing the arrangement to domestic corporations
which earn foreign-derived deduction eligible income;
(C) Features that alter the terms of the arrangement, including the
return, in the event the reduction in the domestic corporation's deemed
tangible income return is no longer relevant; or
(D) A below-market return absent the tax effects or benefits
resulting from the reduction in the domestic corporation's deemed
tangible income return.
(3) Per se rules for certain transactions. For purposes of
paragraph (h)(1) of this section, a transfer of property by a domestic
corporation to a specified related party (including a party deemed to
be a specified related party under paragraph (h)(2) of this section)
followed by a lease of the same or substantially similar property by
the domestic corporation or an FDII-eligible related party from a
specified related party (including a party deemed to be a specified
related party under paragraph (h)(2) of this section) is treated per se
as occurring pursuant to a principal purpose of decreasing the amount
of the domestic corporation's deemed tangible income return if both the
transfer and the lease occur within a six-month period.
(4) Definitions related to anti-avoidance rule. The following
definitions apply for purpose of this paragraph (h).
(i) Disqualified period. The term disqualified period means, with
respect to a transfer, the period beginning one year before the date of
the transfer and ending the earlier of the end of the remaining
recovery period (under the system described in section 951A(d)(3)(A))
of the property or one year after the date of the transfer.
(ii) FDII-eligible related party. The term FDII-eligible related
party means, with respect to a domestic corporation, a member of the
same consolidated group as the domestic corporation or a partnership
with respect to which at least 80 percent of the interests in
partnership capital and profits are owned, directly or indirectly, by
the domestic corporation or one or more members of the consolidated
group that includes the domestic corporation.
(iii) Specified related party. The term specified related party
means, with respect to a domestic corporation, a related party (as
defined in Sec. 1.250(b)-1(c)(19)) other than an FDII-eligible related
party.
(iv) Transfer. The term transfer means any disposition, exchange,
contribution, or distribution of property, and includes an indirect
transfer. For example, a transfer of an interest in a partnership is
treated as a transfer of the assets of the partnership. In addition, if
paragraph (h)(1) of this section applies to treat a domestic
corporation as owning specified tangible property by reason of a lease
of the property, the termination or lapse of the lease of the property
is treated as a transfer of the property by the domestic corporation to
the lessor.
(5) Examples. The following examples illustrate the application of
this paragraph (h).
(i) Example 1: Sale-leaseback with a related party--(A) Facts.
DC, a domestic corporation, owns Asset A, which is specified
tangible property. DC also owns all the single class of stock of DS,
a domestic corporation, and FS1 and FS2, each a controlled foreign
corporation. DC and DS are members of the same consolidated group.
On January 1, Year 1, DC sells Asset A to FS1. At the time of the
sale, Asset A had a
[[Page 8220]]
remaining recovery period of 10 years under the alternative
depreciation system. On February 1, Year 1, FS2 leases Asset B,
which is substantially similar to Asset A, to DS for a five-year
term ending on January 31, Year 6.
(B) Analysis. Because DC transfers specified tangible property
(Asset A), to a specified related party of DC (FS1), and, within a
six month period (January 1, Year 1 to February 1, Year 1), an FDII-
eligible related party of DC (DS) leases a substantially similar
property (Asset B), DC's transfer of Asset A and lease of Asset B
are treated as per se occurring pursuant to a principal purpose of
decreasing the amount of its deemed tangible income return.
Accordingly, for purposes of determining DC's qualified business
asset investment, DC is treated as owning Asset A from February 1,
Year 1, the later of the date of the transfer of Asset A (January 1,
Year 1) and the beginning of the term of the lease of Asset B
(February 1, Year 1), until January 31, Year 6, the earlier of the
end of the term of the lease of Asset B (January 31, Year 6) or the
remaining recovery period of Asset A (December 31, Year 10).
(ii) Example 2: Sale-leaseback with a related party; lapse of
initial lease--(A) Facts. The facts are the same as in paragraph
(h)(5)(i)(A) of this section (the facts in Example 1). In addition,
DS allows the lease of Asset B to expire on February 1, Year 6. On
June 1, Year 6, DS and FS2 renew the lease for a five-year term
ending on May 31, Year 11.
(B) Analysis. Because DC is treated as owning Asset A under
paragraph (h)(1) of this section, the lapse of the lease of Asset B
is treated as a transfer of Asset A to FS2 on February 1, Year 6,
under paragraph (h)(4)(iv) of this section. Further, because DC is
deemed to transfer specified tangible property (Asset A) to a
specified related party (FS2) upon the lapse of the lease, and
within a six month period (February 1, Year 6 to June 1, Year 6), an
FDII-eligible related party of DC (DS) leases a substantially
similar property (Asset B), DC's deemed transfer of Asset A under
paragraph (h)(4)(iv) of this section and lease of Asset B are
treated as per se occurring pursuant to a principal purpose of
decreasing the amount of its deemed tangible income return.
Accordingly, for purposes of determining DC's qualified business
asset investment, DC is treated as owning Asset A from June 1, Year
6, the later of the date of the deemed transfer of Asset A (February
1, Year 6) and the beginning of the term of the lease of Asset B
(June 1, Year 6), until December 31, Year 10, the earlier of the end
of the term of the lease of Asset B (May 31, Year 11) or the
remaining recovery period of Asset A (December 31, Year 10).
Sec. 1.250(b)-3 FDDEI transactions.
(a) Scope. This section provides rules related to the determination
of whether a sale of property or provision of a service is a FDDEI
transaction. Paragraph (b) of this section provides definitions related
to the determination of whether a sale of property or provision of a
service is a FDDEI transaction. Paragraph (c) of this section provides
rules regarding a sale of property or provision of a service to a
foreign government or an international organization. Paragraph (d) of
this section provides rules for determining the reliability of
documentation. Paragraph (e) of this section provides a rule for
characterizing a transaction with both sales and services elements.
Paragraph (f) of this section provides a rule for treating certain loss
transactions as FDDEI transactions. Paragraph (g) of this section
provides a rule for determining whether a sale of property or provision
of a service to a partnership is a FDDEI transaction.
(b) Definitions. This paragraph (b) provides definitions that apply
for purposes of this section and Sec. Sec. 1.250(b)-4 through
1.250(b)-6.
(1) FDII filing date. The term FDII filing date means, with respect
to a sale of property by a seller or provision of a service by a
renderer, the date, including extensions, by which the seller or
renderer is required to file an income tax return (or in the case of a
seller or renderer that is a partnership, a return of partnership
income) for the taxable year in which the gross income from the sale of
property or provision of a service is included in the gross income of
the seller or renderer.
(2) Foreign person. The term foreign person means a person that is
not a United States person, and includes a foreign government or an
international organization.
(3) General property. The term general property means any property
other than--
(i) Intangible property;
(ii) A security (as defined in section 475(c)(2)); or
(iii) A commodity (as defined in section 475(e)(2)(B) through (D)).
(4) Intangible property. The term intangible property has the
meaning set forth in section 367(d)(4).
(5) Recipient. The term recipient means a person that purchases
property or services from a seller or renderer.
(6) Renderer. The term renderer means a person that provides a
service to a recipient.
(7) Sale. The term sale means any sale, lease, license, exchange,
or disposition of property, and includes any transfer of property in
which gain or income is recognized under section 367.
(8) Seller. The term seller means a person that sells property to a
recipient.
(9) United States. The term United States has the meaning set forth
in section 7701(a)(9), as expanded by section 638(1) with respect to
mines, oil and gas wells, and other natural deposits.
(10) United States person. The term United States person has the
meaning set forth in section 7701(a)(30), except that the term does not
include an individual that is a bona fide resident of a United States
territory within the meaning of section 937(a).
(11) United States territory. The term United States territory
means American Samoa, Guam, the Northern Mariana Islands, Puerto Rico,
or the U.S. Virgin Islands.
(c) Foreign military sales. For purposes of determining whether a
sale of property or a provision of a service is a FDDEI transaction, if
a sale of property or a provision of a service is made to the United
States or an instrumentality thereof pursuant to 22 U.S.C. 2751 et seq.
under which the United States or an instrumentality thereof purchases
the property or service for resale or on-service, on commercial terms,
to a foreign government or agency or instrumentality thereof, and the
contract between the seller or renderer and the United States or an
instrumentality thereof provides that the sale or service is purchased
for resale or on-service to such foreign government or agency or
instrumentality thereof, then the sale of property or provision of a
service is treated as a sale of property or a provision of a service to
the foreign government.
(d) Reliability of documentation. For purposes of the documentation
requirements described in Sec. Sec. 1.250(b)-4 through 1.250(b)-6,
documentation is reliable only if each of the requirements described in
paragraphs (d)(1) through (3) of this section is satisfied.
(1) As of the FDII filing date, the seller or renderer does not
know and does not have reason to know that the documentation is
unreliable or incorrect. For this purpose, a seller or renderer has
reason to know that documentation is unreliable or incorrect if its
knowledge of all the relevant facts or statements contained in the
documentation is such that a reasonably prudent person in the position
of the seller or renderer would question the accuracy or reliability of
the documentation.
(2) The documentation is obtained by the seller or renderer by the
FDII filing date with respect to the sale or service.
(3) The documentation is obtained no earlier than one year before
the date of the sale or service.
(e) Transactions with multiple elements. If a transaction includes
both a sale component and a service component, the transaction is
classified
[[Page 8221]]
according to the overall predominant character of the transaction for
purposes of determining whether the transaction is subject to Sec.
1.250(b)-4 or Sec. 1.250(b)-5.
(f) Treatment of certain loss transactions--(1) In general. If a
seller knows or has reason to know that property is sold to a foreign
person for a foreign use (within the meaning of Sec. 1.250(b)-4(d)(2)
or (e)(2)) or a renderer knows or has reason to know that a general
service (as defined in Sec. 1.250(b)-5(c)(4)) is provided to a person
located outside the United States (within the meaning of Sec.
1.250(b)-5(d)(2) or (e)(2)), but the seller or renderer does not
satisfy the documentation requirements described in Sec. 1.250(b)-
4(c)(2), (d)(3), or (e)(3) or Sec. 1.250(b)-5(d)(3) or (e)(3), as
applicable, the transaction is deemed to be a FDDEI transaction with
respect to a domestic corporation if not treating the transaction as a
FDDEI transaction would increase the amount of the corporation's
foreign-derived deduction eligible income for the taxable year relative
to its foreign-derived deduction eligible income that would be
determined if the transaction were treated as a FDDEI transaction. If a
seller or renderer engages in more than one transaction described in
the preceding sentence in a taxable year, the previous sentence applies
by comparing the corporation's foreign-derived deduction eligible
income if each such transaction were not treated as a FDDEI transaction
to its foreign-derived deduction eligible income if each such
transaction were treated as a FDDEI transaction.
(2) Example. The following example illustrates the application
of this paragraph (f).
(i) Facts. During a taxable year, DC, a domestic corporation,
manufactures products A and B in the United States. DC sells product
A for $200x and product B for $800x. DC knows or has reason to know
that all of its sales of product A and product B are to foreign
persons for a foreign use. DC establishes that its sales of product
B are to foreign persons for a foreign use but does not obtain
documentation establishing that any sales of product A are to
foreign person for a foreign use. DC's cost of goods sold is $450x.
For purposes of determining gross FDDEI, under Sec. 1.250(b)-
1(d)(1) DC attributes $250x of cost of goods sold to product A and
$200x of cost of goods sold to product B, and then attributes the
cost of goods sold for each product ratably between the gross
receipts of such product sold to foreign persons and the gross
receipts of such product not sold to foreign persons. The manner in
which DC attributes the cost of goods sold is a reasonable method.
DC has no other items of income, loss, or deduction.
Table 1 to Paragraph (f)(2)(i)
----------------------------------------------------------------------------------------------------------------
Product A Product B Total
----------------------------------------------------------------------------------------------------------------
Gross receipts.................................................. $200x $800x $1,000x
Cost of Goods Sold.............................................. 250x 200x 450x
Gross Income (Loss)............................................. (50x) 600x 550x
----------------------------------------------------------------------------------------------------------------
(ii) Analysis. By not treating the sales of product A as FDDEI
sales, the amount of DC's foreign-derived deduction eligible income
would increase by $50x relative to its foreign-derived deduction
eligible income if the sales of product A were treated as FDDEI
sales. Accordingly, because DC knows or has reason to know that its
sales of product A are to foreign persons for a foreign use, the
sales of product A constitute FDDEI sales under paragraph (f)(1) of
this section, and thus the $50x loss from the sale of product A is
included in DC's gross FDDEI.
(g) Treatment of partnerships--(1) In general. For purposes of
determining whether a sale of property to or by a partnership or a
provision of a service to or by a partnership is a FDDEI transaction, a
partnership is treated as a person. Accordingly, for example, a
partnership may be a seller, renderer, recipient, or related party,
including a foreign related party (as defined in Sec. 1.250(b)-
6(b)(1)).
(2) Examples. The following examples illustrate the application of
this paragraph (g).
(i) Example 1: Domestic partner sale to foreign partnership
with a foreign branch--(A) Facts. DC, a domestic corporation, is a
partner in PRS, a foreign partnership. DC and PRS are not related
parties. PRS has a foreign branch within the meaning of Sec. 1.904-
4(f)(3)(iii). DC and PRS both use the calendar year as their taxable
year. For the taxable year, DC recognizes $20x of gain on the sale
of general property to PRS for a foreign use (as determined under
Sec. 1.250(b)-4(d)). During the same taxable year, PRS recognizes
an additional $20x of gain on the sale of the property to a foreign
person for a foreign use (as determined under Sec. 1.250(b)-4(d)).
PRS's income on the sale of the property is attributable to its
foreign branch.
(B) Analysis. DC's sale of property to PRS, a foreign
partnership, is a FDDEI sale because it is a sale to a foreign
person for a foreign use. Therefore, DC's gain of $20x on the sale
to PRS is included in DC's gross DEI and gross FDDEI. However, PRS's
gain of $20x is not included in the gross DEI or gross FDDEI of PRS
because the gain is foreign branch income within the meaning of
Sec. 1.250(b)-1(c)(11). Accordingly, none of PRS's gain on the sale
of property is included in DC's gross DEI or gross FDDEI under Sec.
1.250(b)-1(e)(1).
(ii) Example 2: Domestic partner sale to domestic partnership
without a foreign branch--(A) Facts. The facts are the same as in
paragraph (g)(2)(i)(A) of this section (the facts in Example 1),
except PRS is a domestic partnership that does not have a foreign
branch within the meaning of Sec. 1.904-4(f)(3)(iii).
(B) Analysis. DC's sale of property to PRS, a domestic
partnership, is not a FDDEI sale because the sale is to a United
States person. Therefore, the gross income from DC's sale to PRS is
included in DC's gross DEI, but is not included in its gross FDDEI.
However, PRS's subsequent sale is a FDDEI sale, and therefore the
gain of $20x is included in the gross DEI and gross FDDEI of PRS.
Accordingly, DC includes its distributive share of PRS's gain from
the sale in determining DC's gross DEI and gross FDDEI for the
taxable year under Sec. 1.250(b)-1(e)(1).
Sec. 1.250(b)-4 FDDEI sales.
(a) Scope. This section provides rules for determining whether a
sale of property is a FDDEI sale. Paragraph (b) of this section defines
a FDDEI sale. Paragraph (c) of this section provides rules for
determining whether a recipient is a foreign person. Paragraph (d) of
this section provides rules for determining whether general property is
sold for a foreign use. Paragraph (e) of this section provides rules
for determining whether intangible property is sold for a foreign use.
Paragraph (f) of this section provides a special rule for the sale of
certain financial instruments.
(b) Definition of FDDEI sale. Except as provided in Sec. 1.250(b)-
6(c), the term FDDEI sale means a sale of general property or
intangible property to a foreign person (as determined under paragraph
(c) of this section) for a foreign use (as determined under paragraphs
(d) and (e) of this section).
(c) Foreign person--(1) In general. A recipient is a foreign person
for purposes of paragraph (b) of this section only if the seller
establishes that the recipient is a foreign person by obtaining the
documentation described in paragraph (c)(2) of this section (which
meets the reliability requirements described in Sec. 1.250(b)-3(d))
and, as of the FDII filing date, the seller does not know or have
reason to
[[Page 8222]]
know that the recipient is not a foreign person.
(2) Documentation of status as a foreign person--(i) In general.
Except as provided in paragraph (c)(2)(ii) of this section, a seller
establishes the status of a recipient as a foreign person by obtaining
one or more of the following types of documentation with respect to the
person--
(A) A written statement by the recipient that the recipient is a
foreign person;
(B) With respect to a recipient that is an entity, documentation
that establishes that the entity is organized or created under the laws
of a foreign jurisdiction;
(C) With respect to an individual, any valid identification issued
by a foreign government or an agency thereof that is typically used for
identification purposes;
(D) Documents filed with a government or an agency or
instrumentality thereof that provide the foreign jurisdiction of
organization or residence of an entity (for example, a publicly traded
corporation's annual report filed with the U.S. Securities and Exchange
Commission that includes the jurisdiction of organization or residence
of foreign subsidiaries of the corporation); or
(E) Any other forms of documentation as prescribed by the Secretary
in forms, instructions, or other guidance.
(ii) Special rules--(A) Special rule for small businesses. A seller
that receives less than $10,000,000 in gross receipts during a prior
taxable year establishes the status of any recipient as a foreign
person for a taxable year if the seller's shipping address for the
recipient is outside the United States. If the seller's prior taxable
year was less than 12 months (a short period), gross receipts are
annualized by multiplying the gross receipts for the short period by
365 and dividing the result by the number of days in the short period.
(B) Special rule for small transactions. A seller that receives
less than $5,000 in gross receipts during a taxable year from a
recipient establishes the status of such recipient as a foreign person
for such taxable year if the seller's shipping address for the
recipient is outside the United States.
(d) Foreign use for general property--(1) In general. The sale of
general property is for a foreign use only if the seller establishes
that the property is for a foreign use within the meaning of paragraph
(d)(2) of this section by obtaining the documentation described in
paragraph (d)(3) of this section (which meets the reliability
requirements described in Sec. 1.250(b)-3(d)) and, as of the FDII
filing date, the seller does not know or have reason to know that the
property is not for a foreign use within the meaning of paragraph
(d)(2) of this section.
(2) Determination of foreign use--(i) In general. Except as
provided in paragraph (d)(2)(iv) of this section, the sale of general
property is for a foreign use if--
(A) The property is not subject to a domestic use within three
years of the date of delivery; or
(B) The property is subject to manufacture, assembly, or other
processing outside the United States before the property is subject to
a domestic use.
(ii) Determination of domestic use. General property is subject to
domestic use if--
(A) The property is subject to any use, consumption, or disposition
within the United States; or
(B) The property is subject to manufacture, assembly, or other
processing within the United States.
(iii) Determination of manufacture, assembly, or other processing--
(A) In general. General property is subject to manufacture, assembly,
or other processing only if the property is physically and materially
changed (as described in paragraph (d)(2)(iii)(B) of this section) or
the property is incorporated as a component into a second product (as
described in paragraph (d)(2)(iii)(C) of this section).
(B) Property subject to a physical and material change. For
purposes of paragraph (d)(2)(iii)(A) of this section, the determination
of whether general property is subject to a physical and material
change is made based on all the relevant facts and circumstances.
However, general property is not considered subject to physical and
material change if it is subject only to minor assembly, packaging, or
labeling.
(C) Property incorporated into second product as a component. For
purposes of paragraph (d)(2)(iii)(A) of this section, general property
is treated as a component incorporated into a second product only if
the fair market value of such property when it is delivered to the
recipient constitutes no more than 20 percent of the fair market value
of the second product, determined when the second product is completed.
For purposes of the preceding sentence, all general property that is
sold by the seller and incorporated into the second product is treated
as a single item of property.
(iv) Determination of foreign use for transportation property. In
the case of aircraft, railroad rolling stock, vessel, motor vehicle, or
similar property that provides a mode of transportation and is capable
of traveling internationally (international transportation property),
such property is for a foreign use only if, during the three year
period from the date of delivery, the property is located outside the
United States more than 50 percent of the time and more than 50 percent
of the miles traversed in the use of the property are traversed outside
the United States. For purposes of the preceding sentence,
international transportation property is deemed to be within the United
States at all times during which it is engaged in transport between any
two points within the United States, except where the transport
constitutes uninterrupted international air transportation within the
meaning of section 4262(c)(3) and the regulations under that section
(relating to tax on air transportation of persons).
(3) Documentation of foreign use of general property--(i) In
general. Except as provided in paragraphs (d)(3)(ii) and (iii) of this
section, a seller establishes that general property, or a portion of a
particular class of fungible general property, is for a foreign use
only if the seller obtains one or more of the following types of
documentation with respect to the sale--
(A) A written statement from the recipient or a related party of
the recipient that the recipient's use or intended use of the property
is for a foreign use (within the meaning of paragraph (d)(2) of this
section);
(B) A binding contract between the seller and the recipient which
provides that the recipient's use or intended use of the property is
for a foreign use (within the meaning of paragraph (d)(2) of this
section);
(C) Except in the case of international transportation property,
documentation of shipment of the general property (including both
property located within the United States or outside the United States,
such as in a warehouse, storage facility, or assembly site located
outside United States) to a location outside the United States (for
example, a copy of the export bill of lading issued by the carrier
which delivered the property, or a copy of the certificate of lading
for the property executed by a customs officer of the country to which
the property is delivered); or
(D) Any other forms of documentation as prescribed by the Secretary
in forms, instructions, or other guidance.
(ii) Special rules--(A) Special rule for small businesses. A seller
that receives less than $10,000,000 in gross receipts during the prior
taxable year establishes that the sale of general property in a taxable
year to any recipient is for a
[[Page 8223]]
foreign use for the taxable year if the seller's shipping address for
the recipient is outside the United States. If the seller's prior
taxable year was a short period, gross receipts are annualized by
multiplying the gross receipts for the short period by 365 and dividing
the result by the number of days in the short period.
(B) Special rule for small transactions. A seller that receives
less than $5,000 in gross receipts during a taxable year from a
recipient establishes that the sale of general property to the
recipient is for a foreign use for the taxable year if the seller's
shipping address for the recipient is outside the United States.
(iii) Sales of fungible mass of general property. In the case of
sales of multiple items of general property, which because of their
fungible nature cannot reasonably be specifically traced to the
location of use (fungible mass), as an alternative to obtaining the
documentation described in paragraphs (d)(3)(i)(A) through (D) of this
section, a seller may establish that a portion of the fungible mass is
for a foreign use through market research, including statistical
sampling, economic modeling and other similar methods indicating that
the property will be subject to a foreign use. If, under the preceding
sentence, the seller establishes that 90 percent or more of a fungible
mass is for a foreign use, then the entire fungible mass is for a
foreign use. If, under the first sentence of this paragraph
(d)(3)(iii), the seller does not establish that 10 percent or more of
the sale of a fungible mass is for a foreign use, then no portion of
the fungible mass is for a foreign use.
(4) Examples. The following examples illustrate the application of
this paragraph (d).
(i) Presumed facts. The following facts are assumed for purposes of
the examples--
(A) DC is a domestic corporation.
(B) FP is a foreign person that is a foreign unrelated party (as
defined in Sec. 1.250(b)-6(b)(2)) with respect to DC, and DC obtains
documentation establishing that FP is a foreign person.
(C) Any documentation obtained meets the reliability requirements
described in Sec. 1.250(b)-3(d).
(D) The treatment of any sale as a FDDEI sale would not reduce DC's
foreign-derived deduction eligible income for the year.
(ii) Examples.
(A) Example 1: Manufacturing outside the United States--(1)
Facts. DC sells general property for $18x to FP for manufacture
outside the United States and obtains documentation of shipment of
the property to a location outside the United States. DC does not
know or have reason to know that the property will be subject to a
domestic use before manufacture, but DC knows or has reason to know
that the property will be subject to a domestic use after
manufacture and within three years of delivery to FP. FP will
incorporate the property into a second product outside the United
States that FP will sell to a United States person for $100x. The
property is not physically or materially changed in the process of
its incorporation into the second product.
(2) Analysis. Because the fair market value of the general
property FP purchases from DC and incorporates into the second
product does not exceed 20% of the fair market value of the second
product, the general property FP purchases from DC is a component,
and therefore the property is treated as subject to manufacture,
assembly, or other processing outside the United States. See
paragraphs (d)(2)(iii)(A) and (B) of this section. As a result,
notwithstanding that DC knows or has reason to know that the
property will be subject to a domestic use within three years of
delivery, DC does not know or have reason to know that its sale of
general property to FP is not for a foreign use. See paragraph
(d)(2)(i)(B) of this section. Accordingly, DC's sale of property to
FP is for a foreign use under paragraph (d)(2) of this section, and
the sale is a FDDEI sale.
(B) Example 2: Manufacturing outside the United States--(1)
Facts. The facts are the same as in paragraph (d)(2)(iv)(A)(1) of
this section (the facts in Example 1), except FP purchases the
general property from DC for $25x.
(2) Analysis. Because the fair market value of the general
property FP purchases from DC and incorporates into the second
product exceeds 20% of the fair market value of the second product,
the general property is not treated as a component of the second
product. Because the property is also not subject to a physical and
material change in the process of incorporation into the second
product, the property is not subject to manufacture, assembly, or
other processing outside the United States. As a result, because DC
knows or has reason to know that FP will sell the second product,
which includes the property, for domestic use, DC knows or has
reason to know that its sale of general property to FP is not for a
foreign use. Accordingly, DC's sale of the property to FP is not for
a foreign use under paragraph (d)(2) of this section, and the sale
is not a FDDEI sale.
(C) Example 3: Sale of a fungible mass of products--(1) Facts.
DC and persons other than DC sell multiple units of fungible general
property to FP during the taxable year. DC obtains documentation of
shipment of the property to a location outside the United States,
but it knows or has reason to know that some portion of the property
will be resold back to customers in the United States. DC also
engages in reliable market research that determines that
approximately 25% of the fungible general property FP sold during
the taxable year is for domestic use.
(2) Analysis. Notwithstanding that the documentation of shipment
meets the reliability requirements of Sec. 1.250(b)-3(d), DC knows
or has reason to know that certain units of the property are not for
a foreign use. See paragraphs (d)(1) and (2) of this section.
However, DC can establish foreign use of a portion of the fungible
property through its market research. See paragraphs (d)(1) and
(d)(3)(iii) of this section. Based on its market research, DC knows
that approximately 25% of the total units of fungible general
property that FP purchased from all persons in the taxable year is
sold by FP for domestic use. Accordingly, DC satisfies the test for
a foreign use under paragraph (d)(2) of this section with respect to
75% of its sales of the property to FP.
(e) Foreign use for intangible property--(1) In general. A sale of
intangible property is for a foreign use only to the extent the seller
establishes that the sale is for a foreign use within the meaning of
paragraph (e)(2) of this section by obtaining documentation described
in paragraph (e)(3) of this section (which meets the reliability
requirements described in Sec. 1.250(b)-3(d)) and, as of the FDII
filing date, the seller does not know or have reason to know that the
portion of the sale of the intangible property for which the seller
establishes foreign use is not for a foreign use within the meaning of
paragraph (e)(2) of this section.
(2) Determination of foreign use--(i) In general. A sale of
intangible property is for a foreign use only to the extent that the
intangible property generates revenue from exploitation outside the
United States. A sale of intangible property rights providing for
exploitation both within the United States and outside the United
States is for a foreign use in proportion to the revenue generated from
exploitation of the intangible property outside the United States over
the total revenue generated from the exploitation of the intangible
property. For intangible property used in the development, manufacture,
sale, or distribution of a product, the intangible property is treated
as exploited at the location of the end user when the product is sold
to the end user. Paragraphs (e)(2)(ii) and (iii) of this section
provide rules for how and when to determine revenue from exploitation
with respect to different types of sales of intangible property.
(ii) Sales in exchange for periodic payments. In the case of a sale
of intangible property to a foreign person in exchange for periodic
payments, the extent to which the sale is for a foreign use is
determined on an annual basis based on the actual revenue earned by the
recipient for the taxable year in which a periodic payment is received.
(iii) Sales in exchange for a lump sum. In the case of a sale of
intangible property to a foreign person for a lump sum, the extent to
which the sale is for a foreign use is determined based on the
[[Page 8224]]
ratio of the total net present value of revenue the seller would have
reasonably expected to earn from the exploitation of the intangible
property outside the United States to the total net present value of
revenue the seller would have reasonably expected to earn from the
exploitation of the intangible property.
(3) Documentation of foreign use of intangible property--(i)
Documentation for sales for periodic payments. Except as provided in
paragraph (e)(3)(ii) of this section, a seller establishes the extent
to which a sale of intangible property described in paragraph
(e)(2)(ii) of this section is for a foreign use by obtaining one or
more of the following types of documentation with respect to the sale--
(A) A written statement from the recipient providing the amount of
the annual revenue from sales or sublicenses of the intangible property
or sales of products with respect to which the intangible property is
used that is generated as a result of exploitation of the intangible
property outside the United States and the total amount of revenue from
such sales or sublicenses worldwide;
(B) A binding contract for the sale of the intangible property that
provides that the intangible property can be exploited solely outside
the United States;
(C) Audited financial statements or annual reports of the recipient
stating the amount of annual revenue earned within the United States
and outside the United States from sales of products with respect to
which the intangible property is used;
(D) Any statements or documents used by the seller and the
recipient to determine the amount of payment due for exploitation of
the intangible property if those statements or documents provide
reliable data on revenue earned within the United States and outside
the United States; or
(E) Any other forms of documentation as prescribed by the Secretary
in forms, instructions, or other guidance.
(ii) Certain sales to foreign unrelated parties. In the case of a
sale of intangible property described in paragraph (e)(2)(ii) of this
section that are not contingent on revenue or profit to a foreign
unrelated party (as defined in Sec. 1.250(b)-6(b)(2)), where the
seller is unable to obtain the documentation described in paragraph
(e)(3)(i) of this section without undue burden, a seller establishes
the extent to which the sale of intangible property is for a foreign
use using the principles of paragraph (e)(3)(iii) of this section,
except that the seller must make reasonable projections on an annual
basis.
(iii) Documentation for sales in exchange for a lump sum. A seller
establishes the extent to which a sale of intangible property described
in paragraph (e)(2)(iii) of this section is for a foreign use through
documentation containing reasonable projections of the amount and
location of revenue that the seller would have reasonably expected to
earn from exploiting the intangible property. To be considered
reasonable, the projections must be consistent with the financial data
and projections used by the seller to determine the price it sold the
intangible property to the foreign person.
(4) Examples. The following examples illustrate the application of
this paragraph (e).
(i) Presumed facts. The following facts are assumed for purposes of
the examples--
(A) DC is a domestic corporation.
(B) Except as otherwise provided, FP and FP2 are foreign persons
that are foreign unrelated parties (as defined in Sec. 1.250(b)-
6(b)(2)) with respect to DC.
(C) Any documentation obtained meets the reliability requirements
described in Sec. 1.250(b)-3(d).
(D) All of DC's income is deduction eligible income.
(E) The treatment of any sale as a FDDEI sale would not reduce DC's
foreign-derived deduction eligible income for the year.
(ii) Examples.
(A) Example 1: License of worldwide rights with documentation--
(1) Facts. DC licenses to FP worldwide rights to the copyright to
composition A in exchange for annual royalties of $60x. FP sells
composition A to customers through digital downloads from servers.
In the taxable year, FP earns $100x in revenue from sales of copies
of composition A to customers, of which $60x is from customers
located in the United States and the remaining $40x is from
customers located outside the United States. FP provides DC with
records showing the amount of revenue earned in the taxable year
from sales of composition A to establish the royalties owed to DC.
These records also provide DC with the amount of revenue earned from
sales of composition A in different countries, including the United
States.
(2) Analysis. Based on the information provided, DC has obtained
documentation establishing that 40% ($40x/$100x) of the revenue
generated by the copyright during the taxable year is earned outside
the United States. Accordingly, a portion of DC's license to FP is
for a foreign use under paragraph (e)(2) of this section and
therefore such portion is a FDDEI sale. The $24x of royalty (0.40 x
$60x) derived with respect to such portion is included in DC's gross
FDDEI for the taxable year.
(B) Example 2: License of worldwide rights without
documentation--(1) Facts. The facts are the same as in paragraph
(e)(4)(ii)(A)(1) of this section (the facts in Example 1), except FP
does not provide DC with data showing how much revenue was earned
from sales in different countries.
(2) Analysis. DC has not obtained documentation establishing the
amount of revenue FP earned from sales of composition A outside the
United States. Accordingly, DC's license of the copyright is not for
a foreign use under paragraph (e)(2) of this section and is not a
FDDEI sale.
(C) Example 3: Sale of patent rights protected in the United
States and other countries; documentation through financial
projections--(1) Facts. DC owns a patent for an active
pharmaceutical ingredient (``API'') approved for treatment of
disease A (``indication A'') in the United States and in Countries
A, B, and C. The patent is registered in the United States and in
Countries A, B, and C. DC sells to FP all of its patent rights to
the API for indication A for a lump sum payment of $1,000x. DC has
no basis in the patent rights. To determine the sales price for the
patent rights, DC projected that the net present value of the
revenue it would earn from selling a pharmaceutical product
incorporating the API for indication A was $5,000x, with 15% of the
revenue earned from sales within the United States and 85% of the
revenue earned from sales outside the United States.
(2) Analysis. Based on the financial projections DC used to
determine the sales price, DC has obtained documentation
establishing that 85% of the revenue that will be generated by the
patent rights will be outside the United States. Accordingly, a
portion of DC's sale to FP is for a foreign use under paragraph
(e)(2) of this section and such portion is a FDDEI sale. The $850x
(85% x $1,000x) of gain derived with respect to such portion is
included in DC's gross FDDEI for the taxable year.
(D) Example 4: Limited use license of copyrighted computer
software; documentation through public filing--(1) Facts. DC
provides FP with a limited use license to copyrighted computer
software in exchange for an annual fee of $100x. The limited use
license restricts FP's use of the computer software to 100 of FP's
employees. The limited use license prohibits FP from using the
computer software in any way other than as an end-user, which
includes prohibiting sublicensing, selling, reverse engineering, or
modifying the computer software. FP's annual report for the taxable
year indicates that all of FP's employees are physically located
outside the United States.
(2) Analysis. The software licensed to FP is exploited where its
employees that use the software are located. The revenue DC earns
from the limited use license to FP is based on the number of FP's
employees allowed to use the computer software as end-users. Based
on FP's annual report for the taxable year, DC has obtained
documentation establishing that all the revenue generated for the
use of the copyrighted computer software is earned outside the
United States for the taxable year. Accordingly, DC's license to FP
is for a foreign use and therefore a FDDEI
[[Page 8225]]
sale. The entire $100x of the license fee is included in DC's gross
FDDEI for the taxable year.
(E) Example 5: Limited use license of copyrighted computer
software; documentation through public filing--(1) Facts. The facts
are the same as in paragraph (e)(4)(ii)(D)(1) of this section (the
facts in Example 4), except that FP's annual report for the taxable
year indicates that FP has offices both within and outside the
United States, and that 50% of FP's revenue is earned within the
United States.
(2) Analysis. Based on FP's annual report for the taxable year,
DC has obtained documentation establishing that 50% of the revenue
generated from the use of the copyrighted computer software is
outside the United States for the taxable year. Accordingly, a
portion of DC's license to FP is for a foreign use and therefore
such portion is a FDDEI sale. The $50x of license fee derived with
respect to such portion is included in DC's gross FDDEI for the
taxable year.
(F) Example 6: Deemed sale in exchange for contingent payments
under section 367(d)--(1) Facts. DC owns 100% of the stock of FP, a
foreign related party (as defined in Sec. 1.250(b)-6(b)(1)) with
respect to DC. FP manufactures and sells product A. For the taxable
year, DC contributes to FP exclusive worldwide rights to patents,
trademarks, knowhow, customer lists, and goodwill and going concern
value (collectively, intangible property) related to product A in an
exchange described in section 351. As a result, DC is required to
report an annual income inclusion on its Federal income tax return
based on the productivity, use, or disposition of the contributed
intangible property under section 367(d). DC includes a percentage
of FP's revenue in its gross income under section 367(d) each year.
In the current taxable year, FP earns $1,000x of revenue from sales
of product A. Based on FP's sales records for the taxable year,
$300x of its revenue is earned from sales of product A to customers
within the United States, and $700x of its revenue is earned from
sales of product A to customers outside the United States.
(2) Analysis. DC's deemed sale of the intangible property to FP
in exchange for payments contingent upon the productivity, use, or
disposition of the intangible property related to product A under
section 367(d) is a sale for purposes of section 250 and this
section. See Sec. 1.250(b)-3(b)(7). Based on FP's sales records, DC
has obtained documentation that 70% ($700/$1,000x) of the revenue
generated by the intangible property is generated outside the United
States in the taxable year. Accordingly, for the taxable year, 70%
of DC's deemed sale to FP is for a foreign use, and 70% of DC's
income inclusion under section 367(d) derived with respect to such
portion is included in DC's gross FDDEI for the taxable year.
(f) Special rule for certain financial instruments. The sale of a
security (as defined in section 475(c)(2)) or a commodity (as defined
in section 475(e)(2)(B) through (D)) is not a FDDEI sale.
Sec. 1.250(b)-5 FDDEI services.
(a) Scope. This section provides rules for determining whether a
provision of a service is a FDDEI service. Paragraph (b) of this
section defines a FDDEI service. Paragraph (c) of this section provides
definitions relevant for determining whether a provision of a service
is a FDDEI service. Paragraph (d) of this section provides rules for
determining whether a general service is provided to a consumer located
outside the United States. Paragraph (e) of this section provides rules
for determining whether a general service is provided to a business
recipient located outside the United States. Paragraph (f) of this
section provides rules for determining whether a proximate service is
provided to a recipient located outside the United States. Paragraph
(g) of this section provides rules for determining whether a service is
provided with respect to property located outside the United States.
Paragraph (h) of this section provides rules for determining whether a
transportation service is provided to a recipient, or with respect to
property, located outside the United States.
(b) Definition of FDDEI service. Except as provided in Sec.
1.250(b)-6(d), the term FDDEI service means a provision of a service
described in one of paragraphs (b)(1) through (5) of this section. If
only a portion of a service is treated as provided to a person, or with
respect to property, outside the United States, the provision of the
service is a FDDEI service only to the extent of the gross income
derived with respect to such portion.
(1) The provision of a general service to a consumer located
outside the United States (as determined under paragraph (d) of this
section).
(2) The provision of a general service to a business recipient
located outside the United States (as determined under paragraph (e) of
this section).
(3) The provision of a proximate service to a recipient located
outside the United States (as determined under paragraph (f) of this
section).
(4) The provision of a property service with respect to tangible
property located outside the United States (as determined under
paragraph (g) of this section).
(5) The provision of a transportation service to a recipient, or
with respect to property, located outside the United States (as
determined under paragraph (h) of this section).
(c) Definitions. This paragraph (c) provides definitions that apply
for purposes of this section and Sec. 1.250(b)-6.
(1) Benefit. The term benefit has the meaning set forth in Sec.
1.482-9(l)(3).
(2) Business recipient. The term business recipient means a
recipient other than a consumer.
(3) Consumer. The term consumer means a recipient that is an
individual that purchases a general service for personal use.
(4) General service. The term general service means any service
other than a property service, proximate service, or transportation
service.
(5) Property service. The term property service means a service,
other than a transportation service, provided with respect to tangible
property, but only if substantially all of the service is performed at
the location of the property and results in physical manipulation of
the property such as through assembly, maintenance, or repair.
Substantially all of a service is performed at the location of property
if the renderer spends more than 80 percent of the time providing the
service at or near the location of the property.
(6) Proximate service. The term proximate service means a service,
other than a property service or a transportation service, provided to
a recipient, but only if substantially all of the service is performed
in the physical presence of the recipient or, in the case of a business
recipient, its employees. Substantially all of a service is performed
in the physical presence of the recipient or its employees if the
renderer spends more than 80 percent of the time providing the service
in the physical presence of the recipient or its employees.
(7) Transportation service. The term transportation service means a
service to transport a person or property using aircraft, railroad
rolling stock, vessel, motor vehicle, or any similar mode of
transportation.
(d) General services provided to consumers--(1) In general. A
general service is provided to a consumer located outside the United
States only if the renderer establishes that the consumer is located
outside the United States by obtaining the documentation described in
paragraph (d)(3) of this section (which meets the reliability
requirements described in Sec. 1.250(b)-3(d)) and, as of the FDII
filing date, the renderer does not know or have reason to know that the
consumer is located within the United States (as determined under
paragraph (d)(2) of this section) when the service is provided.
(2) Location of consumer. For purposes of paragraph (d)(1) of this
section, the consumer of a general service is located where the
consumer resides when the service is provided.
(3) Documentation of location of consumer--(i) In general. Except
as
[[Page 8226]]
provided in paragraph (d)(3)(ii) of this section, a renderer
establishes that a consumer is located outside the United States only
if the renderer obtains one or more of the following types of
documentation with respect to the consumer--
(A) A written statement by the consumer indicating that the
consumer resides outside the United States when the service is
provided;
(B) Any valid identification issued by a foreign government or an
agency thereof that is typically used for identification purposes; or
(C) Any other forms of documentation as prescribed by the Secretary
in forms, instructions, or other guidance.
(ii) Special rules--(A) Special rule for small businesses. A
renderer that receives less than $10,000,000 in gross receipts during
the prior taxable year establishes that any consumer of a service
provided in the taxable year is located outside the United States if
the renderer's billing address for the consumer is outside of the
United States. If a renderer has a prior taxable year of fewer than 12
months (a short period), gross receipts are annualized by multiplying
the gross receipts for the short period by 365 and dividing the result
by the number of days in the short period.
(B) Special rule for small transactions. A renderer that receives
less than $5,000 in gross receipts during a taxable year from a
consumer establishes that such consumer is located outside the United
States for such taxable year if the renderer's billing address for the
consumer is outside the United States.
(e) General services provided to business recipients--(1) In
general. A general service is provided to a business recipient located
outside the United States only to the extent that the renderer
establishes that the service is provided to a business recipient
located outside the United States (as determined under paragraph (e)(2)
of this section) by obtaining the documentation described in paragraph
(e)(3) of this section (which meets the reliability requirements
described in Sec. 1.250(b)-3(d)) and, as of the FDII filing date, the
renderer does not know or have reason to know that the portion of the
service which the seller establishes is provided to a business
recipient located outside the United States is provided to a business
recipient that is located within the United States when the service is
provided.
(2) Location of business recipient--(i) In general. A service is
provided to a business recipient located outside of the United States
to the extent that the gross income derived by the renderer from such
service is allocated to the business recipient's operations outside the
United States under the rules in paragraphs (e)(2)(i)(A) and (B) of
this section. A service is provided to a business recipient located
within the United States to the extent that a service is not provided
to a business recipient located outside the United States.
(A) Determination of business operations that benefit from the
service. If the renderer provides a service that provides a benefit to
the operations of the business recipient in specific locations, gross
income of the renderer is allocated to a business recipient's
operations outside the United States to the extent that the benefit of
the service is conferred on operations of the business recipient that
are located outside the United States. However, if the renderer is
unable to obtain reliable information regarding the specific locations
of the operations of the business recipient to which a benefit is
conferred, or if the renderer provides a service that does not provide
a benefit to specific locations of the business recipient's operations
but rather will generally confer a benefit on all locations of the
business recipient's operations, gross income of the renderer is
allocated ratably to all of the business recipient's operations at the
time the service is provided.
(B) Determination of amount of benefit conferred on operations
outside the United States. The amount of the benefit conferred on a
business recipient's operations located outside the United States is
determined under any method that is reasonable under the circumstances.
In determining whether a method is reasonable, the principles of Sec.
1.482-9(k) apply, treating the business recipient's operations in
different locations as if they were ``recipients'' and treating the
renderer's gross income as if they were ``costs'' as those terms are
used in Sec. 1.482-9(k). Reasonable methods may include, for example,
allocations based on time spent or costs incurred by the renderer or
gross receipts, revenue, profits, or assets of the business recipient.
(ii) Location of business recipient's operations. For purposes of
this paragraph (e), a business recipient is treated as having
operations in any location where it maintains an office or other fixed
place of business.
(3) Documentation of location of business recipient--(i) In
general. A renderer establishes that a business recipient is located
outside the United States only if the renderer obtains one or more of
the types of documentation described in paragraphs (e)(3)(i)(A) through
(E) of this section. The documentation must also support the renderer's
allocation of income described in paragraph (e)(2)(i) of this section.
(A) A written statement from the business recipient that specifies
the locations of the operations of the business recipient that benefit
from the service.
(B) A binding contract that specifies the locations of the
operations of the business recipient that benefit from the service.
(C) Documentation obtained in the ordinary course of the provision
of the service that specifies the locations of the operations of the
business recipient that benefit from the service.
(D) Publicly available information that establishes the locations
of the operations of the business recipient.
(E) Any other forms of documentation as prescribed by the Secretary
in forms, instructions, or other guidance.
(ii) Special rules--(A) Special rule for small businesses. A
renderer that receives less than $10,000,000 in gross receipts during a
prior taxable year establishes that a business recipient of a service
provided in a taxable year is located outside the United States if the
renderer's billing address for the business recipient is outside of the
United States. If the renderer's prior taxable year is less than 12
months (a short period), gross receipts are annualized by multiplying
the gross receipts for the short period by 365 and dividing the result
by the number of days in the short period.
(B) Special rule for small transactions. A renderer that receives
less than $5,000 in gross receipts during a taxable year from services
provided to a business recipient in such taxable year establishes that
such business recipient is located outside the United States if the
renderer's billing address for the business recipient is outside the
United States.
(4) Related parties. For purposes of this paragraph (e), a
reference to a business recipient includes a reference to any related
party of the business recipient.
(5) Examples. The following examples illustrate the application of
this paragraph (e).
(i) Presumed facts. The following facts are assumed for purposes of
the examples--
(A) DC is a domestic corporation.
(B) A and R are not related parties of DC.
(C) Any documentation obtained meets the reliability requirements
described in Sec. 1.250(b)-3(d).
(D) The treatment of any service as a FDDEI service would not
reduce DC's
[[Page 8227]]
foreign-derived deduction eligible income for the year.
(ii) Examples.
(A) Example 1: Service that benefits specific aspects of the
business recipient's business--(1) Facts. For the taxable year, DC
provides a marketing service to R, a company that operates
restaurants within and outside of the United States, in exchange for
$150x. Publicly available information indicates that 50% of the
revenue earned by R and its related parties is from customers
located outside of the United States. However, the marketing service
that DC provides relates specifically to a single chain of
restaurants that R operates. Sales information that R provides to DC
indicates that 70% of the revenue of the restaurant chain is from
locations within the United States and 30% of the revenue is from
locations outside the United States.
(2) Analysis. R is located outside the United States in part
under paragraph (e)(2)(i) of this section because DC's services
benefit both R's operations within the United States and its
operations outside the United States. Under paragraph (e)(2)(i) of
this section, the portion of the service provided by DC that is
treated as provided to a person located outside the United States is
determined by the amount of DC's gross income from the service that
is allocated to R's operations outside the United States. Because DC
provides a service that provides a benefit to R's operations in
specific locations, and reliable information about the specific
locations of the operations that receive a benefit is available, DC
must determine R's location based on information relating
specifically to R's business operations that benefits from DC's
service. See paragraph (e)(2)(i)(A) of this section. In this case,
allocation of DC's gross income based on the revenue of the business
recipient is a reasonable method. See paragraph (e)(2)(i)(B) of this
section. Therefore, 30% of the provision of the marketing service is
treated as the provision of a service to a person located outside
the United States and a FDDEI service under paragraph (b)(2) of this
section. Accordingly, $45x ($150x x 0.30) of DC's gross income from
the provision of the marketing service is included in DC's gross
FDDEI for the taxable year.
(B) Example 2: Service that benefits the business recipient's
operations generally--(1) Facts. The facts are the same as in
paragraph (e)(5)(ii)(A)(1) of this section (the facts in Example 1),
except that DC provides an information technology service to R that
benefits R's entire business.
(2) Analysis. Because the service that DC provides relate to R's
entire business, DC may rely on publicly available information
indicating that 50% of R's operations are outside of the United
States. See paragraph (e)(2)(i)(A) of this section. Therefore, 50%
of the provision of the information technology service is treated as
a service to a person located outside the United States and a FDDEI
service under paragraph (b)(2) of this section. Accordingly, $75x
($150x x 0.50) of DC's gross income from the provision of the
information technology service is included in DC's gross FDDEI for
the taxable year.
(C) Example 3: No reliable information about which operations
benefit from the service--(1) Facts. The facts are the same as in
paragraph (e)(5)(ii)(A)(1) of this section (the facts in Example 1),
except that no information is available to DC about the specific
chain of restaurants for which the service is provided.
(2) Analysis. Because the only information available to DC
relates to R's entire business, DC may rely on publicly available
information indicating that 50% of R's operations are outside of the
United States to determine the portion of the service treated as
provided to a person located outside the United States. See
paragraph (e)(2)(i)(A) of this section. Therefore, 50% of the
provision of the marketing service is treated as a service to a
person located outside the United States and a FDDEI service under
paragraph (b)(2) of this section. Accordingly, $75x ($150x x 0.50)
of DC's gross income from the provision of the marketing service is
included in DC's gross FDDEI for the taxable year.
(D) Example 4: Service provided to a domestic intermediary--(1)
Facts. A, a domestic corporation that operates solely in the United
States, enters into a services agreement with R, a company that
operates solely outside the United States. Under the agreement, A
agrees to perform a consulting service for R. A hires DC to provide
a service to A that A will use in the provision of a consulting
service to R.
(2) Analysis. A is located within the United States because the
service that DC provides A confers a benefit solely to A's
operations within the United States. R is located outside the United
States because the service that A provides to R confers a benefit
solely to R's operations outside the United States. See paragraph
(e)(2)(i) of this section. Because DC provides a service to A, a
person located within the United States, DC's provision of the
service to A is not a FDDEI service under paragraph (b)(2) of this
section, even though the service is used by A in providing a service
to R, a person located outside the United States. See also section
250(b)(5)(B)(ii). However, A's provision of the consulting service
to R may be a FDDEI service, in which case A's gross income from the
provision of such service would be included in A's gross FDDEI.
(f) Proximate services. A proximate service is provided with
respect to a recipient located outside the United States if the
proximate service is performed outside the United States. In the case
of a proximate service performed partly within the United States and
partly outside of the United States, a proportionate amount of the
service is treated as provided to a recipient located outside the
United States corresponding to the portion of time the renderer spends
providing the service outside of the United States.
(g) Property services. A property service is provided with respect
to tangible property located outside the United States only if the
property is located outside the United States for the duration of the
period the service is performed.
(h) Transportation services. Except as provided in this paragraph
(h), a transportation service is provided to a recipient, or with
respect to property, located outside the United States only if both the
origin and the destination of the service are outside of the United
States. However, in the case of a transportation service provided to a
recipient, or with respect to property, where either the origin or the
destination of the service is outside of the United States, but not
both, then 50 percent of the transportation service is considered
provided to a recipient, or with respect to property, located outside
the United States.
Sec. 1.250(b)-6 Related party transactions.
(a) Scope. This section provides additional rules for determining
whether a sale of property or a provision of a service to a related
party is a FDDEI transaction. Paragraph (b) of this section provides
additional definitions relevant for determining whether a sale of
property or a provision of a service to a related party is a FDDEI
transaction. Paragraph (c) of this section provides additional rules
for determining whether a sale of general property to a foreign related
party is a FDDEI sale. Paragraph (d) of this section provides
additional rules for determining whether the provision of a general
service to a business recipient that is a related party is a FDDEI
service.
(b) Definitions. This paragraph (b) provides definitions that apply
for purposes of this section.
(1) Foreign related party. The term foreign related party means,
with respect to a seller or renderer, any foreign person that is a
related party of the seller or renderer.
(2) Foreign unrelated party. The term foreign unrelated party
means, with respect to a seller, a foreign person that is not a related
party of the seller.
(3) Related party sale. The term related party sale means a sale of
general property to a foreign related party that satisfies the
requirements described in Sec. 1.250(b)-4(b) without regard to
paragraph (c) of this section. See Sec. 1.250(b)-1(e)(3)(ii)(D)
(Example 4) for an illustration of a related party sale in the case of
a seller that is a partnership.
(4) Related party service. The term related party service means a
provision of a general service to a business recipient that is a
related party of the renderer and that is described in Sec. 1.250(b)-
5(b)(2) without regard to paragraph (d) of this section.
[[Page 8228]]
(5) Unrelated party transaction. The term unrelated party
transaction means, with respect to property purchased in a related
party sale from a seller--
(i) A sale of the property by a foreign related party to a foreign
unrelated party with respect to the seller;
(ii) A sale of property by a foreign related party to a foreign
unrelated party with respect to the seller if the property sold in the
related party sale is a component of the property sold to the foreign
unrelated party;
(iii) A sale of property by a foreign related party to a foreign
unrelated party with respect to the seller, other than a sale described
in paragraph (b)(5)(ii) of this section, if the property sold in the
related party sale is used in connection with the property sold to the
foreign unrelated party; or
(iv) A provision of a service by a foreign related party to a
foreign unrelated party with respect to the seller, if the property
sold in the related party sale was used in connection with the
provision of the service.
(c) Related party sales--(1) In general. A related party sale is a
FDDEI sale only if the requirements described in either paragraph
(c)(1)(i) or (ii) of this section are satisfied with respect to the
related party sale. Section 250(b)(5)(C)(i) and this paragraph (c) does
not apply to determine whether a sale of intangible property to a
foreign related party is a FDDEI sale.
(i) Sale of property in an unrelated party transaction. A related
party sale is a FDDEI sale if an unrelated party transaction described
in paragraph (b)(5)(i) or (ii) of this section occurs with respect to
the property purchased in the related party sale, such unrelated party
transaction is described in Sec. 1.250(b)-4(b), and, except as
provided in this paragraph (c)(1)(i), the unrelated party transaction
occurs on or before the FDII filing date. In the case of an unrelated
party transaction that occurs after the FDII filing date with respect
to a related party sale, a taxpayer may file an amended return for the
taxable year in which the related party sale occurred, within the
period of limitations provided by section 6511, claiming the related
party sale as a FDDEI sale for purposes of determining the taxpayer's
foreign-derived intangible income for that taxable year.
(ii) Use of property in an unrelated party transaction. A related
party sale is a FDDEI sale if, as of the FDII filing date, the seller
in the related party sale reasonably expects that one or more unrelated
party transactions described in paragraph (b)(5)(iii) or (iv) of this
section will occur with respect to the property purchased in the
related party sale, such unrelated party transaction or transactions
would be described in Sec. 1.250(b)-4(b) or Sec. 1.250(b)-5(b)
without regard to the documentation rules in Sec. 1.250(b)-4 or Sec.
1.250(b)-5, and more than 80 percent of the revenue earned by the
foreign related party with respect to the property will be earned from
such unrelated party transaction or transactions.
(2) Treatment of foreign related party as seller or renderer. For
purposes of determining whether a sale of property or provision of a
service by a foreign related party is, or would be, described in Sec.
1.250(b)-4 or Sec. 1.250(b)-5 (except for purposes of obtaining
documentation), the foreign related party that sells the property or
provides the service is treated as a seller or renderer, as applicable,
and the foreign unrelated party is treated as the recipient. In the
case of an unrelated party transaction described in paragraph (b)(5)(i)
or (ii) of this section, the seller in the related party sale must
obtain the documentation required in Sec. 1.250(b)-4.
(3) Transactions between a foreign related party and other foreign
related parties. All foreign related parties of the seller are treated
as if they were a single foreign related party for purposes of applying
paragraphs (c)(1) and (2) of this section. Accordingly, if a foreign
related party sells or uses property purchased in a related party sale
in a transaction with a second foreign related party of the seller,
transactions between the second foreign related party and unrelated
parties may be treated as an unrelated party transaction for purposes
of applying paragraph (c)(1) of this section to a related party sale.
(4) Example. The following example illustrates the application
of paragraph (c) of this section.
(i) Facts. DC, a domestic corporation, sells a machine to FC, a
foreign related party of DC in a transaction described in Sec.
1.250(b)-4(b) (without regard to Sec. 1.250(b)-6(c)). FC uses the
machine solely to manufacture product A. As of the FDII filing date
for the taxable year, FC reasonably expects that more than 80% of
future revenue from sales of product A will be from sales that would
be described in Sec. 1.250(b)-4(b) without regard to the
documentation requirements of Sec. 1.250(b)-4(c) and (d).
(ii) Analysis. The sale by DC to FC is a related party sale.
Because FC uses the machine to make product A, but the machine is
not a component of product A, FC's sale of product A is an unrelated
party transaction described in paragraph (b)(5)(iii) of this
section. Therefore, DC's sale of the machine is only a FDDEI sale if
the requirements of paragraph (c)(1)(ii) of this section are
satisfied. Because DC reasonably expects that more than 80% of the
revenue from future sales of product A will be from unrelated party
transactions that would be described in Sec. 1.250(b)-4(b), DC's
sale of the machine to FC is a FDDEI sale.
(d) Related party services--(1) In general. Except as provided in
this paragraph (d)(1), a related party service is a FDDEI service only
if the related party service is not substantially similar to a service
provided by the related party to a person located within the United
States. However, if a related party service is substantially similar to
a service provided (in whole or in part) by the related party to a
person located in the United States solely by reason of paragraph
(d)(2)(ii) of this section, the amount of gross income from the related
party service attributable to a FDDEI service is equal to the gross
income from the related party service multiplied by a fraction, the
numerator of which is the sum of the benefits conferred by the related
party service to persons not located within the United States and the
denominator of which is the sum of all benefits conferred by the
related party service. Section 250(b)(5)(C)(ii) and this paragraph
(d)(1) apply only to a general service provided to a business recipient
and are not applicable with respect to any other service provided to a
foreign related party.
(2) Substantially similar services. A related party service is
substantially similar to a service provided by the related party to a
person located within the United States only if the related party
service is used by the related party to provide a service to a person
located within the United States and either--
(i) 60 percent or more of the benefits conferred by the related
party service are to persons located within the United States; or
(ii) 60 percent or more of the price paid by persons located within
the United States for the service provided by the related party is
attributable to the related party service.
(3) Location of recipient of services provided by related party.
For purposes of paragraph (d) of this section, the location of a
consumer or business recipient with respect to a related party service
is determined under the principles of Sec. 1.250(b)-5(d)(2) and
(e)(2), respectively.
(4) Examples. The following examples illustrate the application of
this paragraph (d).
(i) Presumed facts. The following facts are assumed for purposes of
the examples--
(A) DC is a domestic corporation.
(B) FC is a foreign corporation and a foreign related party of DC
that operates solely outside the United States.
(C) The service DC provides to FC is a general service provided to
a business
[[Page 8229]]
recipient located outside the United States as described in Sec.
1.250(b)-5(b)(2) without regard to the application of paragraph (d) of
this section.
(D) The benefits conferred by DC's service to FC's customers are
not indirect or remote within the meaning of Sec. 1.482-9(l)(3)(ii).
(ii) Examples.
(A) Example 1: Services that are substantially similar services
under paragraph (d)(2)(i) of this section--(1) Facts. FC enters into
a services agreement with R, a company that operates restaurant
chains within and outside the United States. Under the agreement, FC
agrees to furnish a design for the renovation of a chain of
restaurants that R owns, which design will include architectural
plans. FC hires DC to provide an architectural service to FC that FC
will use in the provision of its design service to R. The
architectural service that DC provides to FC will serve no other
purpose than to enable FC to provide its service to R. The
architectural service will benefit solely R's operations within the
United States. FC pays an arm's length price of $50x to DC for the
architectural service and DC recognizes $50x of gross income from
the service. FC incurs additional costs to add additional design
elements to the plans and charges R a total of $100x for its
service.
(2) Analysis. The service that DC provides to FC is used in the
provision of a service to R. R is treated as entirely located within
the United States under paragraph (d)(3) of this section and the
principles of Sec. 1.250(b)-5(e)(2) because only its U.S.
operations benefit from the service provided by DC. Because FC uses
DC's architectural service to provide its design service to R, and
the architectural service that DC provides to FC will serve no
purpose other than to enable FC to provide its service to R, 100% of
the benefits conferred by DC's architectural service are to R, a
person located within the United States. Therefore, the service
provided by DC to FC is substantially similar to the service
provided by FC to R under paragraph (d)(2)(i) of this section.
Accordingly, DC's provision of the architectural service to FC is
not a FDDEI service under paragraph (d)(1) of this section and DC's
gross income from the architectural service ($50x) is not included
in its gross FDDEI.
(B) Example 2: Services that are substantially similar services
under paragraph (d)(2)(ii) of this section--(1) Facts. The facts are
the same as paragraph (d)(4)(ii)(A)(1) (the facts in Example 1),
except that FC pays an arm's length price of $75x to DC for the
architectural service, DC recognizes $75x of gross income from the
service, and 90% of the benefits of DC's architectural service are
conferred on R's operations outside the United States.
(2) Analysis--(i) Analysis under paragraph (d)(2)(i) of this
section. R is treated as located within the United States with
respect to DC's architectural service under paragraph (d)(3) of this
section to the extent of the benefits conferred on its operations
within the United States by the architectural service. See Sec.
1.250(b)-5(e)(2). Because 90% of the benefits of DC's architectural
service are conferred on R's operations outside the United States,
only 10% of the benefits of DC's architectural service are treated
as conferred on persons located within the United States under
paragraph (d)(3) of this section. Therefore, the architectural
service provided by DC to FC is not substantially similar to the
design service provided by FC to persons located within the United
States under paragraph (d)(2)(i) of this section.
(ii) Analysis under paragraph (d)(2)(ii) of this section.
Because 10% of the benefits of FC's architectural design services
are conferred on R's operations within the United States, $10x of
the amount paid by R for FC's services (10% x $100) is treated as
paid by persons located within the United States. Similarly, because
10% of the benefits of DC's architectural services are conferred on
R's operations within the United States, of the $10x paid with
respect to R's operations within the United States, $7.5x (10% x
$75x) is attributable to DC's architectural service. Accordingly,
because 75% ($7.5 x /$10x) of the price paid by R to FC for the
design service is attributable to the architectural service provided
by DC to FC, and R is a person located within the United States
under paragraph (d)(3) of this section and the principles of Sec.
1.250(b)-5(e)(2), the architectural service provided by DC to FC is
substantially similar to the design service provided by FC to
persons located within the United States under paragraph (d)(2)(ii)
of this section.
(iii) Application of paragraph (d)(1) of this section. Because
DC's architectural service is substantially similar to FC's design
service provided to R, a person located in the United States, solely
by reason of paragraph (d)(2)(ii) of this section, the amount of
gross income from DC's architectural service included in its gross
FDDEI is $67.5x, which is equal to DC's gross income from the
architectural service ($75x) multiplied by 90%, which is the
percentage of the benefits of DC's architectural service that are
conferred on R's operations outside the United States.
0
Par. 3. Section 1.962-1 is amended by adding paragraphs
(b)(1)(i)(A)(2), (b)(1)(i)(B)(3), and revising paragraph (d) to read as
follows:
Sec. 1.962-1 Limitation of tax for individuals on amounts included in
gross income under section 951(a).
* * * * *
(b) * * *
(1) * * *
(i) * * *
(A) * * *
(2) His GILTI inclusion amount (as defined in Sec. 1.951A-1(c)(1))
for the taxable year; plus
* * * * *
(B) * * *
(3) The portion of the deduction under section 250 and Sec.
1.250(a)-1 that would be allowed to a domestic corporation equal to the
percentage applicable to global intangible low-taxed income for the
taxable year under section 250(a)(1)(B) (including as modified by
section 250(a)(3)(B)) multiplied by the sum of the amount described in
paragraph (b)(1)(i)(A)(2) of this section and the amount described in
paragraph (b)(1)(i)(A)(3) of this section that is attributable to the
amount described in paragraph (b)(1)(i)(A)(2) of this section.
* * * * *
(d) Applicability dates. Except as otherwise provided in this
paragraph (d), paragraph (b)(1)(i) of this section applies beginning
the last taxable year of a foreign corporation that begins before
January 1, 2018, and with respect to a United States person, for the
taxable year in which or with which such taxable year of the foreign
corporation ends. Paragraph (b)(1)(i)(B)(3) applies to taxable years of
a foreign corporation ending on or after March 4, 2019, and with
respect to a United States person, for the taxable year in which or
with which such taxable year of the foreign corporation ends.
0
Par. 4. Section 1.1502-12, as proposed to be amended in 83 FR 51072
(Oct. 10, 2018), is further amended by adding paragraph (t) to read as
follows:
Sec. 1.1502-12 Separate taxable income.
* * * * *
(t) See Sec. 1.1502-50 for rules relating to the computation of a
member's deduction under section 250.
0
Par. 5. Section 1.1502-13, as proposed to be amended in 83 FR 67490
(Dec. 28, 2018), is further amended:
0
1. In paragraph (a)(6)(ii), under the heading ``Matching rule. (Sec.
1.1502-13(c)(7)(ii))'', by adding entry (T); and
0
2. Adding paragraph (c)(7)(ii)(T).
The additions read as follows:
Sec. 1.1502-13 Intercompany transactions.
(a) * * *
(6) * * *
(ii) * * *
Matching rule. (Sec. 1.1502-13(c)(7)(ii))
* * * * *
(T) Example 20. Redetermination of attributes for section 250
purposes.
* * * * *
(c) * * *
(7) * * *
(ii) * * *
(T) Example 20: Redetermination of attributes for section 250
purposes--(1) Facts. S manufactures equipment in the United States
and recognizes $75 of gross income included in gross DEI (as defined
in Sec. 1.250(b)-1(c)(14)) on the sale of Asset, which is not
depreciable property, to B in Year 1 for $100. In Year 2, B sells
Asset to X for $125 and recognizes $25 of gross income. The sale is
a FDDEI sale (as defined in Sec. 1.250(b)-1(c)(8)), and thus the
$25 of income is included in B's gross FDDEI (as defined in Sec.
1.250(b)-1(c)(15)) for Year 2.
[[Page 8230]]
(2) Timing and attributes. S's $75 of intercompany income is
taken into account in Year 2 under the matching rule to reflect the
$75 difference between B's $25 corresponding item taken into account
(based on B's $100 cost basis in Asset) and the recomputed
corresponding item (based on the $25 basis that B would have if S
and B were divisions of a single corporation and B's basis were
determined by reference to S's basis). In determining whether S's
gross income included in gross DEI from the sale of Asset is
included in gross FDDEI, S and B are treated as divisions of a
single corporation. See paragraph (a)(6) of this section. In
determining the amount of income included in gross DEI that is
included in gross FDDEI, the attributes of S's intercompany item and
B's corresponding item may be redetermined to the extent necessary
to produce the same effect on consolidated taxable income (and
consolidated tax liability) as if S and B were divisions of a single
corporation. See paragraph (c)(1)(i) of this section. Applying
section 250 and Sec. 1.1502-50 on a single entity basis, all $100
of income included in gross DEI would be gross FDDEI. On a separate
entity basis, S would have $75 of gross income included in gross DEI
that is included in gross non-FDDEI (as defined in Sec. 1.250(b)-
1(c)(16)) and B would have $25 of gross income included in gross DEI
that is included in gross FDDEI. Thus, on a separate entity basis, S
and B would have, in the aggregate, $100 of gross income included in
gross DEI, of which only $25 is included gross FDDEI. Accordingly,
under single entity treatment, $75 that would be treated as gross
income included in gross DEI that is included in gross non-FDDEI on
a separate entity basis is redetermined to be included in gross
FDDEI.
(3) Intercompany sale for loss. The facts are the same as in
paragraph (c)(7)(ii)(T)(1) (the facts in Example 20), except that S
recognizes $25 of loss on the sale of Asset. S's $25 of intercompany
loss is taken into account under the matching rule to reflect the
$25 difference between B's $25 corresponding item taken into account
(based on B's $100 cost basis in Asset) and the recomputed
corresponding item (based on the $125 basis that B would have if S
and B were divisions of a single corporation and B's basis were
determined by reference to S's $125 of costs). Applying section 250
and Sec. 1.1502-50 on a single entity basis, $0 of income would be
included in gross DEI. In order to reflect this result, under the
matching rule, S's $25 loss is allocated and apportioned solely to
B's $25 of gross income from the sale of Asset for purposes of
determining B's DEI and FDDEI. Furthermore, B's $25 of gross income
is not taken into account for purposes of apportioning any other
deductions under section 861 and the regulations under that section
for purposes of determining any member's DEI or FDDEI.
* * * * *
0
Par. 6. Section 1.1502-50 is added to read as follows:
Sec. 1.1502-50 Consolidated section 250.
(a) In general--(1) Scope. This section provides rules for applying
section 250 and the regulations thereunder (the section 250
regulations, see Sec. Sec. 1.250(a)-1 through 1.250(b)-6) to a member
of a consolidated group (member). Paragraph (b) of this section
provides rules for the determination of the amount of the deduction
allowed to a member under section 250(a)(1). Paragraph (c) of this
section provides rules governing the impact of intercompany
transactions on the determination of a member's qualified business
asset investment and the effect of intercompany transactions on the
determination of a member's foreign-derived deduction eligible income.
Paragraph (d) of this section provides rules governing basis
adjustments to member stock resulting from the application of paragraph
(b)(1) of this section. Paragraph (e) of this section provides
definitions. Paragraph (f) of this section provides examples
illustrating the rules of this section. Paragraph (g) of this section
provides an applicability date.
(2) Overview. The rules of this section ensure that the aggregate
amount of deductions allowed under section 250 to members appropriately
reflects the income, expenses, gains, losses, and property of all
members. Paragraph (b) of this section allocates the consolidated
group's overall deduction amount under section 250 to each member on
the basis of its contribution to the consolidated foreign-derived
deduction eligible income and consolidated global intangible low-taxed
income. The definitions in paragraph (e) of this section provide for
the aggregation of the deduction eligible income, foreign-derived
deduction eligible income, deemed tangible income return, and global
intangible low-taxed income of all members in order to calculate the
consolidated group's overall deduction amount under section 250.
(b) Allowance of deduction--(1) In general. A member is allowed a
deduction for a consolidated return year under section 250. See Sec.
1.250(a)-1(b). The amount of the deduction is equal to the sum of--
(i) The product of the consolidated FDII deduction amount and the
member's FDII deduction allocation ratio; and
(ii) The product of the consolidated GILTI deduction amount and the
member's GILTI deduction allocation ratio.
(2) Consolidated taxable income limitation. For purposes of
applying the limitation described in Sec. 1.250(a)-1(b)(2) to the
determination of the consolidated FDII deduction amount and the
consolidated GILTI deduction amount of a consolidated group for a
consolidated return year--
(i) The consolidated foreign-derived intangible income (if any) is
reduced (but not below zero) by an amount which bears the same ratio to
the consolidated section 250(a)(2) amount that such consolidated
foreign-derived intangible income bears to the sum of the consolidated
foreign-derived intangible income and the consolidated global
intangible low-taxed income; and
(ii) The consolidated global intangible low-taxed income (if any)
is reduced (but not below zero) by the excess of the consolidated
section 250(a)(2) amount over the reduction described in paragraph
(b)(2)(i) of this section.
(c) Impact of intercompany transactions--(1) Impact on qualified
business asset investment determination. For purposes of determining a
member's qualified business asset investment, the basis of specified
tangible property does not include an amount equal to any gain or loss
realized with respect to such property by another member in an
intercompany transaction (as defined in Sec. 1.1502-13(b)(1)), whether
or not such gain or loss is deferred. Thus, for example, if a selling
member owns specified tangible property with an adjusted basis (within
the meaning of section 1011) of $60x and an adjusted basis (for
purposes of calculating qualified business asset investment) of $80x,
and sells it for $50x to the purchasing member, the basis of such
property for purposes of computing the purchasing member's qualified
business asset investment is $80x.
(2) Impact on foreign-derived deduction eligible income
characterization. For purposes of redetermining attributes of members
from an intercompany transaction as foreign-derived deduction eligible
income, see Sec. 1.1502-13(c)(1)(i) and (c)(7)(ii)(T), Example 20.
(d) Adjustments to the basis of a member. For adjustments to the
basis of a member related to paragraph (b)(1) of this section, see
Sec. 1.1502-32(b)(3)(ii)(B).
(e) Definitions. The following definitions apply for purposes of
this section.
(1) Consolidated deduction eligible income. With respect to a
consolidated group for a consolidated return year, the term
consolidated deduction eligible income means the greater of the sum of
the deduction eligible income (whether positive or negative) of all
members or zero.
(2) Consolidated deemed intangible income. With respect to a
consolidated group for a consolidated return year, the term
consolidated deemed intangible income means the excess (if any) of the
consolidated deduction eligible income,
[[Page 8231]]
over the consolidated deemed tangible income return.
(3) Consolidated deemed tangible income return. With respect to a
consolidated group for a consolidated return year, the term
consolidated deemed tangible income return means the sum of the deemed
tangible income return of all members.
(4) Consolidated FDII deduction amount. With respect to a
consolidated group for a consolidated return year, the term
consolidated FDII deduction amount means the product of the FDII
deduction rate and the consolidated foreign-derived intangible income,
as adjusted by paragraph (b)(2) of this section.
(5) Consolidated foreign-derived deduction eligible income. With
respect to a consolidated group for a consolidated return year, the
term consolidated foreign-derived deduction eligible income means the
greater of the sum of the foreign-derived deduction eligible income
(whether positive or negative) of all members or zero.
(6) Consolidated foreign-derived intangible income. With respect to
a consolidated group for a consolidated return year, the term
consolidated foreign-derived intangible income means, except as
provided in paragraph (e) of this section, the product of the
consolidated deemed intangible income and the consolidated foreign-
derived ratio.
(7) Consolidated foreign-derived ratio. With respect to a
consolidated group for a consolidated return year, the term
consolidated foreign-derived ratio means the ratio (not to exceed one)
of--
(i) The consolidated foreign-derived deduction eligible income; to
(ii) The consolidated deduction eligible income.
(8) Consolidated GILTI deduction amount. With respect to a
consolidated group for a consolidated return year, the term
consolidated GILTI deduction amount means the product of the GILTI
deduction rate and the sum of the consolidated global intangible low-
taxed income, as adjusted by paragraph (b)(2) of this section, and the
amounts treated as dividends received by the members under section 78
which are attributable to their global intangible low-taxed income for
the consolidated return year.
(9) Consolidated global intangible low-taxed income. With respect
to a consolidated group for a consolidated return year, the term
consolidated global intangible low-taxed income means the sum of the
global intangible low-taxed income of all members.
(10) Consolidated section 250(a)(2) amount. With respect to a
consolidated group for a consolidated return year, the term
consolidated section 250(a)(2) amount means the excess (if any) of the
sum of the consolidated foreign-derived intangible income and the
consolidated global intangible low-taxed income (determined without
regard to section 250(a)(2) and paragraph (b)(2) of this section), over
the consolidated taxable income of the consolidated group (within the
meaning of Sec. 1.1502-11) determined with regard to all items of
income, deductions, or loss, except for the deduction allowed under
section 250 and this section. Therefore, for example, consolidated
taxable income under this paragraph (f)(10) is determined taking into
account the application of sections 163(j) and 172(a).
(11) Deduction eligible income. With respect to a member for a
consolidated return year, the term deduction eligible income means the
member's gross DEI for the year (within the meaning of Sec. 1.250(b)-
1(c)(14)) reduced (including below zero) by the deductions properly
allocable to gross DEI for the year (as determined under Sec.
1.250(b)-1(d)(2)).
(12) Deemed tangible income return. With respect to a member for a
consolidated return year, the term deemed tangible income return means
an amount equal to 10 percent of the member's qualified business asset
investment, as adjusted by paragraph (c)(1) of this section.
(13) FDII deduction allocation ratio. With respect to a member for
a consolidated return year, the term FDII deduction allocation ratio
means the ratio of--
(i) The member's positive foreign-derived deduction eligible income
(if any); to
(ii) The sum of the positive foreign-derived deduction eligible
income of all members.
(14) FDII deduction rate. The term FDII deduction rate means 37.5
percent for consolidated return years beginning before January 1, 2026,
and 21.875 percent for consolidated return years beginning after
December 31, 2025.
(15) Foreign-derived deduction eligible income. With respect to a
member for a consolidated return year, the term foreign-derived
deduction eligible income means the member's gross FDDEI for the year
(within the meaning of Sec. 1.250(b)-1(c)(15)) reduced (including
below zero) by the deductions properly allocable to gross FDDEI for the
year (as determined under Sec. 1.250(b)-1(d)(2)).
(16) GILTI deduction allocation ratio. With respect to a member for
a consolidated return year, the term GILTI deduction allocation ratio
means the ratio of--
(i) The sum of the member's global intangible low-taxed income and
the amount treated as a dividend received by the member under section
78 which is attributable to its global intangible low-taxed income for
the consolidated return year; to
(ii) The sum of consolidated global intangible low-taxed income and
the amounts treated as dividends received by the members under section
78 which are attributable to their global intangible low-taxed income
for the consolidated return year.
(17) GILTI deduction rate. The term GILTI deduction rate means 50
percent for consolidated return years beginning before January 1, 2026,
and 37.5 percent for consolidated return years beginning after December
31, 2025.
(18) Global intangible low-taxed income. With respect to a member
for a consolidated return year, the term global intangible low-taxed
income means the sum of the member's GILTI inclusion amount under Sec.
1.1502-51(b) and the member's distributive share of any domestic
partnership's GILTI inclusion amount under Sec. 1.951A-5(b)(2).
(19) Qualified business asset investment. The term qualified
business asset investment has the meaning provided in Sec. 1.250(b)-
2(b).
(20) Specified tangible property. The term specified tangible
property has the meaning provided in Sec. 1.250(b)-2(c)(1).
(f) Examples. The following examples illustrate the rules of this
section.
(1)Example 1: Calculation of deduction attributable to foreign-
derived intangible income--(i) Facts. P is the common parent of the
P group and owns all of the only class of stock of subsidiaries USS1
and USS2. The consolidated return year of all persons is the
calendar year. In 2018, P has deduction eligible income of $400x,
foreign-derived deduction eligible income of $0, and qualified
business asset investment of $0; USS1 has deduction eligible income
of $200x, foreign-derived deduction eligible income of $200x, and
qualified business asset investment of $600x; and USS2 has deduction
eligible income of -$100x, foreign-derived deduction eligible income
of $100x, and qualified business asset investment of $400x. The P
group has consolidated taxable income that is sufficient to make
inapplicable the limitation in paragraph (b)(2) of this section. No
member of the P group has global intangible low-taxed income.
(ii) Analysis. (A) Consolidated deduction eligible income. Under
paragraph (e)(1) of this section, the P group's consolidated
deduction eligible income is $500x, the greater of the sum of the
deduction eligible income (whether positive or negative) of all
members ($400x + $200x-$100x) or zero.
(B) Consolidated foreign-derived deduction eligible income.
Under paragraph (e)(5) of this section, the P group's consolidated
foreign-derived deduction eligible income is
[[Page 8232]]
$300x, the greater of the sum of the foreign-derived deduction
eligible income (whether positive or negative) of all members ($0 +
$200x + $100x) or zero.
(C) Consolidated deemed tangible income return. Under paragraph
(e)(12) of this section, a member's deemed tangible income return is
10% of its qualified business asset investment. Therefore, P's
deemed tangible income return is $0 (0.10 x $0), USS1's deemed
tangible income return is $60x (0.10 x $600x), and USS2's deemed
tangible income return is $40x (0.10 x $400x). Under paragraph
(e)(3) of this section, the P group's consolidated deemed tangible
income return is $100x, the sum of the deemed tangible income return
of all members ($0 + $60x + $40x).
(D) Consolidated deemed intangible income. Under paragraph
(e)(2) of this section, the P group's consolidated deemed intangible
income is $400x, the excess of its consolidated deduction eligible
income over its consolidated deemed tangible income return ($500x-
$100x).
(E) Consolidated foreign-derived intangible income. Under
paragraph (e)(7) of this section, the P group's consolidated
foreign-derived ratio is 0.60, the ratio of its consolidated
foreign-derived deduction eligible income to its consolidated
deduction eligible income ($300x/$500x). Under paragraph (e)(6) of
this section, the P group's consolidated foreign-derived intangible
income is $240x, the product of its consolidated deemed intangible
income and its consolidated foreign-derived ratio ($400x x 0.60).
(F) Consolidated FDII deduction amount. Under paragraph (e)(4)
of this section, the P group's consolidated FDII deduction amount is
$90x, the product of the FDII deduction rate and the consolidated
foreign-derived intangible income (0.375 x $240x).
(G) Member's deduction attributable to consolidated FDII
deduction amount. Under paragraph (b)(1) of this section, a member
is allowed a deduction equal, in part, to the product of the
consolidated FDII deduction amount of the consolidated group to
which the member belongs and the member's FDII deduction allocation
ratio. Under paragraph (e)(13) of this section, a member's FDII
deduction allocation ratio is the ratio of its positive foreign-
derived deduction eligible income to the sum of each member's
positive foreign-derived deduction eligible income for such
consolidated return year. As a result, the FDII deduction allocation
ratios of P, USS1, and USS2 are 0 ($0/$300x), \2/3\ ($200x/$300x),
and 1/3 ($100x/$300x), respectively. Therefore, P, USS1, and USS2
are permitted deductions under paragraph (b)(1) of this section in
the amount of $0 (0 x $90x), $60x (2/3 x $90x), and $30x (1/3 x
$90x), respectively.
(2) Example 2: Limitation on consolidated foreign-derived
deduction eligible income--(i) Facts. The facts are the same as in
paragraph (f)(1)(i) of this section (the facts in Example 1), except
that P's foreign-derived deduction eligible income is $300x.
(ii) Analysis. (A) Consolidated deduction eligible income and
consolidated deemed tangible income return. As in paragraphs
(f)(1)(ii)(A) and (C) of this section (the analysis in Example 1),
the P group's consolidated deduction eligible income is $500x and
the P group's consolidated deemed tangible income return is $100x.
(B) Consolidated foreign-derived deduction eligible income.
Under paragraph (e)(5) of this section, the P group's consolidated
foreign-derived deduction eligible income is $600x, the greater of
the sum of the foreign-derived deduction eligible income (whether
positive or negative) of all members ($300x + $200x + $100x) or
zero.
(C) Consolidated deemed intangible income and consolidated
foreign-derived intangible income. Under paragraph (e)(2) of this
section, the P group's consolidated deemed intangible income is
$400x ($500x-$100x). Under paragraph (e)(7) of this section, the P
group's consolidated foreign-derived ratio is 1.00 ($600x/$500x, but
not in excess of one). Under paragraph (e)(6) of this section, the P
group's consolidated foreign-derived intangible income is $400x
($400x x 1.00).
(D) Consolidated FDII deduction amount and member's deduction
attributable to consolidated FDII deduction amount. Under paragraph
(e)(4) of this section, the P group's consolidated FDII deduction
amount is $150x (0.375 x $400x). Under paragraph (e)(13) of this
section, the FDII deduction allocation ratios of P, USS1, and USS2
are 1/2 ($300/$600x), 1/3 ($200x/$600x), and 1/6 ($100x/$600x),
respectively. Therefore, P, USS1, and USS2 are permitted deductions
under paragraph (b)(1) of this section in the amounts of $75x (1/2 x
$150x), $50x (1/3 x $150x), and $25x (1/6 x $150x), respectively.
(3) Example 3: Member with negative foreign-derived deduction
eligible income--(i) Facts. The facts are the same as in paragraph
(f)(1)(i) of this section (the facts in Example 1), except that P's
foreign-derived deduction eligible income is -$100x.
(ii) Analysis. (A) Consolidated deduction eligible income and
consolidated deemed tangible income return. As in paragraphs
(f)(1)(ii)(A) and (C) of this section (the facts in Example 1), the
P group's consolidated deduction eligible income is $500x and the P
group's consolidated deemed tangible income return is $100x.
(B) Consolidated foreign-derived deduction eligible income.
Under paragraph (e)(5) of this section, the P group's consolidated
foreign-derived deduction eligible income is $200x, the greater of
the sum of the foreign-derived deduction eligible income (whether
positive or negative) of all members (-$100x + $200x + $100x) or
zero.
(C) Consolidated deemed intangible income and consolidated
foreign-derived intangible income. Under paragraphs (e)(2) and (6)
of this section, the P group's consolidated deemed intangible income
is $400x ($500x-$100x), and the P group's consolidated foreign-
derived intangible income is $160x ($400x x ($200x/$500x)).
(D) Consolidated FDII deduction amount and member's deduction
attributable to consolidated FDII deduction amount. Under paragraph
(e)(4) of this section, the P group's consolidated FDII deduction
amount is $60x (0.375 x $160x). Under paragraph (e)(13) of this
section, the FDII deduction allocation ratios of P, USS1, and USS2
are 0 ($0/$300x), 2/3 ($200x/$300x), and 1/3 ($100x/$300x),
respectively. Therefore, P, USS1, and USS2 are permitted deductions
under paragraph (b)(1) of this section in the amounts of $0 (0 x
$60x), $40x (2/3 x $60x), and $20x (1/3 x $60x), respectively.
(4) Example 4: Calculation of deduction attributable to global
intangible low-taxed income--(i) Facts. The facts are the same as in
paragraph (f)(1)(i) of this section (the facts in Example 1), except
that USS1 owns CFC1 and USS2 owns CFC2. USS1 and USS2 have global
intangible low-taxed income of $65x and $20x, respectively, and
amounts treated as dividends received under section 78 attributable
to their global intangible low-taxed income of $10x and $5x,
respectively.
(ii) Analysis. (A) Consolidated global intangible low-taxed
income. Under paragraph (e)(9) of this section, the P group's
consolidated global intangible low-taxed income is $85x, the sum of
the global intangible low-taxed income of all members ($0 + $65x +
$20x).
(B) Consolidated GILTI deduction amount. Under paragraph (e)(8)
of this section, the P group's consolidated GILTI deduction amount
is $50x, the product of the GILTI deduction rate and the sum of its
consolidated global intangible low-taxed income and the amounts
treated as dividends received by the members under section 78 which
are attributable to their global intangible low-taxed income for the
consolidated return year (0.50 x ($85x + $10x + $5x)).
(C) Member's deduction attributable to consolidated GILTI
deduction amount. Under paragraph (b)(1) of this section, a member
is allowed a deduction equal, in part, to the product of the
consolidated GILTI deduction amount of the consolidated group to
which the member belongs and the member's GILTI deduction allocation
ratio. Under paragraph (e)(16) of this section, a member's GILTI
deduction allocation ratio is the ratio of the sum of its global
intangible low-taxed income and the amount treated as a dividend
received by the member under section 78 which is attributable to its
global intangible low-taxed income for the consolidated return year
to the sum of the consolidated global intangible low-taxed income
and the amounts treated as dividends received by the members under
section 78 which are attributable to their global intangible low-
taxed income for the consolidated return year. As a result, the
GILTI deduction allocation ratios of P, USS1, and USS2 are 0 ($0/
($85x + $10x + $5x)), 3/4 (($65x + $10x)/($85x + $10x + $5x)), and
1/4 (($20x + $5x)/($85x + $10x + $5x)), respectively. Therefore, P,
USS1, and USS2 are permitted deductions of $0 (0 x $50x), $37.50x
(3/4 x $50x), and $12.50x (1/4 x $50x), respectively.
(D) Member's deduction under section 250. Under paragraph (b)(1)
of this section, a member is allowed a deduction equal to the sum of
the member's deduction attributable to the consolidated FDII
deduction amount and the member's deduction attributable to the
consolidated GILTI deduction amount. As a result P, USS1, and USS2
are entitled to deductions under paragraph (b)(1) of this section of
$0 ($0 + $0), $97.50x ($60x + $37.50x), and $42.50x ($30x +
$12.50x), respectively.
[[Page 8233]]
(5) Example 5: Taxable income limitation--(i) Facts. The facts
are the same as in paragraph (f)(4)(i) of this section (the facts in
Example 4), except that the P group's consolidated taxable income
(within the meaning of paragraph (e)(10) of this section) is $300x.
(ii) Analysis. (A) Determination of whether the limitation
described in paragraph (b)(2) of this section applies. Under
paragraph (b)(2) of this section, in the case of a consolidated
group with a consolidated section 250(a)(2) amount for a
consolidated year, the amount of the consolidated foreign-derived
intangible income and the consolidated global intangible low-taxed
income otherwise taken into account in the determination of the
consolidated FDII deduction amount and the consolidated GILTI
deduction amount are subject to reduction. As in paragraph
(f)(1)(ii)(E) of this section (the facts in Example 1), the P
group's consolidated foreign-derived intangible income is $240x. As
in paragraph (f)(4)(ii)(A) of this section (the analysis in Example
4), the P group's consolidated global intangible low-taxed income is
$85x. The P group's consolidated taxable income is $300x. Under
paragraph (e)(10) of this section, the P group's consolidated
section 250(a)(2) amount is $25x (($240x + $85x)-$300x), the excess
of the sum of the consolidated foreign-derived intangible income and
the consolidated global intangible low-taxed income, over the P
group's consolidated taxable income. Therefore, the limitation
described in paragraph (b)(2) of this section applies.
(B) Allocation of reduction. Under paragraph (b)(2)(i) of this
section, the P group's consolidated foreign-derived intangible
income is reduced by an amount which bears the same ratio to the
consolidated section 250(a)(2) amount as the consolidated foreign-
derived intangible income bears to the sum of the consolidated
foreign-derived intangible income and consolidated global intangible
low-taxed income, and the P group's consolidated global intangible
low-taxed income is reduced by the excess of the consolidated
section 250(a)(2) amount over the reduction described in paragraph
(b)(2)(i) of this section. Therefore, for purposes of determining
the P group's consolidated FDII deduction amount and consolidated
GILTI deduction amount, its consolidated foreign-derived intangible
income is reduced to $221.54x ($240x - ($25x x ($240x/$325x))) and
its consolidated global intangible low-taxed income is reduced to
$78.46x ($85x - ($25x - ($25x x ($240x/$325x)))).
(C) Calculation of consolidated FDII deduction amount and
consolidated GILTI deduction amount. Under paragraph (e)(4) of this
section, the P group's consolidated FDII deduction amount is $83.08x
($221.54x x 0.375). Under paragraph (e)(8) of this section, the P
group's consolidated GILTI deduction amount is $39.23x ($78.46x x
0.50).
(D) Member's deduction attributable to the consolidated FDII
deduction amount. As in paragraph (f)(1)(ii)(G) of this section (the
analysis in Example 1), the FDII deduction allocation ratios of P,
USS1, and USS2 are 0, 2/3, and 1/3, respectively. Therefore, P,
USS1, and USS2 are permitted deductions attributable to the
consolidated FDII deduction amount of $0 (0 x $83.08x), $55.39x (2/3
x $83.08x), and $27.69x (1/3 x $83.08x), respectively.
(E) Member's deduction attributable to the consolidated GILTI
deduction amount. As in paragraph (f)(4)(ii)(C) of this section (the
analysis in Example 4), the GILTI deduction allocation ratios of P,
USS1, and USS2 are 0, 3/4, and 1/4, respectively. Therefore, P,
USS1, and USS2 are permitted deductions attributable to the
consolidated GILTI deduction amount of $0 (0 x $39.23x), $29.42x (3/
4 x $39.23x), and $9.81x (1/4 x $39.23x), respectively.
(F) Member's deduction pursuant section 250. Under paragraph
(b)(1) of this section, a member is allowed a deduction equal to the
sum of the member's deduction attributable to consolidated FDII
deduction amount and the member's deduction attributable to
consolidated GILTI deduction amount. As a result P, USS1, and USS2
are entitled to deductions under paragraph (b)(1) of this section of
$0 ($0 + $0), $84.81x ($55.39x + $29.42x), and $37.50x ($27.69x +
$9.81x), respectively.
(g) Applicability date. This section applies to consolidated return
years ending on or after the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register.
0
Par. 7. Section 1.6038-2, as proposed to be amended at 83 FR 67612
(Dec. 28, 2018), is further amended by adding paragraph (f)(15) and a
sentence at the end of paragraph (m) to read as follows:
Sec. 1.6038-2 Information returns required of United States persons
with respect to annual accounting periods of certain foreign
corporations beginning after December 31, 1962.
* * * * *
(f) * * *
(15) Information reporting under section 250. If the person
required to file Form 5471 (or any successor form) claims a deduction
under section 250(a) that is determined, in whole or part, by reference
to its foreign-derived intangible income, and any amount required to be
reported under paragraph (f)(11) of this section is included in its
computation of foreign-derived deduction eligible income, such person
will provide on Form 5471 (or any successor form) such information that
is prescribed by the form, instructions, publication, or other
guidance.
* * * * *
(m) * * * Paragraph (f)(15) of this section applies with respect to
information for annual accounting periods beginning on or after March
4, 2019.
0
Par. 8. Section 1.6038-3, as proposed to be amended at 83 FR 67612
(Dec. 28, 2018), is further amended by adding paragraph (g)(4) and a
sentence to the end of paragraph (l) to read as follows:
Sec. 1.6038-3 Information returns required of certain United States
persons with respect to controlled foreign partnerships (CFPs).
* * * * *
(g) * * *
(4) Additional information required to be submitted by a
controlling ten-percent or a controlling fifty-percent partner that has
a deduction under section 250 by reason of FDII. In addition to the
information required pursuant to paragraphs (g)(1), (2), and (3) of
this section, if, with respect to the partnership's tax year for which
the Form 8865 is being filed, a controlling ten-percent partner or a
controlling fifty-percent partner has a deduction under section 250 (by
reason of having foreign-derived intangible income), determined, in
whole or in part, by reference to the income, assets, or activities of
the partnership, or transactions between the controlling-ten percent
partner or controlling fifty-percent partner and the partnership, the
controlling ten-percent partner or controlling fifty-percent partner
must provide its share of the partnership's gross DEI, gross FDDEI,
deductions that are definitely related to the partnership's gross DEI
and gross FDDEI, and partnership QBAI (as those terms are defined in
the section 250 regulations) in the form and manner and to the extent
prescribed by Form 8865 (or any successor form), instruction,
publication, or other guidance.
* * * * *
(l) * * * Paragraph (g)(4) of this section applies for tax years of
a foreign partnership beginning on or after March 4, 2019.
0
Par. 9. Section 1.6038A-2, as proposed to be amended at 83 FR 67612
(Dec. 28, 2018), is further amended by adding paragraph (b)(5)(iv) and
a sentence at the end of paragraph (g) to read as follows:
Sec. 1.6038A-2 Requirements of return.
* * * * *
(b) * * *
(5) * * *
(iv) Information reporting under section 250. If, for the taxable
year, the reporting corporation has a deduction under section 250 (by
reason of having foreign-derived intangible income) with respect to any
amount required to be reported under paragraph (b)(3) or (4) of this
section, the reporting corporation will provide on Form 5472 (or any
successor form) such information about the deduction in the form and
manner and to the extent prescribed by Form 5472 (or any successor
form),
[[Page 8234]]
instruction, publication, or other guidance.
* * * * *
(g) * * * Paragraph (b)(5)(iv) of this section applies with respect
to information for annual accounting periods beginning on or after
March 4, 2019.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-03848 Filed 3-4-19; 4:15 pm]
BILLING CODE 4830-01-P