Semiconductor Foundry Seeks Clarification Under FDII, GILTI Regs

May 6, 2019

CC:PA:LPD:PR (REG-104464-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Comments on proposed § 250 FDII regulations in REG-104464-18

Dear Sirs or Madams,

GLOBALFOUNDRIES US, Inc. (GF") hereby submits these comments on the above-referenced proposed regulations issued under § 250 of the Internal Revenue Code of 1986, as amended, in REG-104464-18, 84 Fed. Reg. 8188 (March 6, 2019) (the "Proposed Regs").

Company Background

GF is a full-service semiconductor foundry delivering technologies for a range of high-growth markets. GF provides a unique combination of semiconductor design, development, and fabrication services, with a range of IP and feature-rich offerings. GF's manufacturing footprint spanning three continents.

Recommendation: The definition of a foreign sale should be clarified for intermediate domestic sales

The TCJA Sec. 14202 conference committee report includes a section entitled Property or services provided to domestic intermediaries.¹ Language in this section reads as follows:

If a taxpayer sells property to another person (other than a related party) for further manufacture or modification within the United States, the property is generally not treated as sold for a foreign use even if such other person subsequently uses such property for foreign use. However, there is an exception to this general rule for property (1) that is ultimately sold by a related party, or used by a related party in connection with property that is sold or the provision of services, to another person who is an unrelated party who is not a U.S. person and (2) that the taxpayer establishes to the satisfaction of the Secretary is for a foreign use. (emphasis added)

The heading of the conference report, and subsequent narrative, addresses sales to domestic non-related intermediaries that further manufacture or modified the property within the United States. Following the rule of continuity, to avoid a discontinuity in the Sec. 250 regulations for intermediate domestic sales that do not involve further manufacturing or modification strongly suggests adding language in the proposed regulations consistent with the following: a sale to a unrelated domestic intermediary that does not manufacture or modify the property in the United States will be treated as sold for foreign use where the taxpayer establishes to the satisfaction of the Secretary [the sale] is for foreign use.

The proposed regulations do reflect this congressional intent in the context of military sales of property. The preamble to the proposed regulations reads as follows:

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 . . . Therefore, a sale of property or provision of a service to the US. 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. (emphasis added)

Formalistic intermediate steps in an international supply chain might not reflect the substance of an international sale. For example, it is not uncommon for a domestic manufacturer to 'flash title sell to a domestic entity, which then sells to its foreign affiliate for foreign use. By adding language to the proposed regulations for intermediate domestic sales to unrelated parties that do not further manufacture or modify the product, Treasury will eliminate any confusion in the regulations surrounding congressional intent to match the substance of foreign sales with the Sec. 250 deduction. Further, adding this clarifying language will eliminate criticism that Treasury introduced preferred treatment for military sales, excluding similar private industry supply chain transactions from Sec. 250 eligibility.

Sincerely,

William C. Barrett
Vice President Taxation
GLOBALFOUNDRIES US, Inc.
Santa Clara, CA