Menu
Tax Notes logo

Clarification of FDII Rules for Cross-Border Transportation Sought

NOV. 19, 2018

Clarification of FDII Rules for Cross-Border Transportation Sought

DATED NOV. 19, 2018
DOCUMENT ATTRIBUTES

* * *

From: Michael DiFronzo (US — Tax) <* * *>

Date: November 19, 2018 at 3:58:19 PM EST

To: Poms, Douglas <* * *>, Scanlon, Gary <Gary.Scanlon@treasury.gov>, Tan, Carol B. <* * *>

Subject: A few thoughts as you head into the holiday . . .

Doug, Gary and Carol,

I hope that you all are going to be able to get a little down time for Thanksgiving. I understand, but can hardly believe, the huge efforts you are making to push guidance related to reform out. As you head into the holiday, I wanted to follow-up with some additional thoughts on FDII for the transportation space. In particular, I wanted to respond to comments in the meeting about the use of a 50:50 method. Please feel free to share these thoughts if you think there is anything useful in them with the group focused on FDII.

First, Doug and Gary, thanks again for meeting with us on September 25 to discuss the United FDII comment letter on cross-border transportation services income. We thought it was a very productive meeting and very much appreciated your time.

As discussed in the United letter and meeting, Congress appears to have intended for the FDII and GILTI provisions to create tax parity between equivalent (deemed) amounts of intangible income generated by a domestic corporation either directly or through a foreign subsidiary — whether the rules actually do that may be open to some debate, but I think the intent was there. Congress demonstrated its intent by noting that the reduced FDII tax rate (i.e., 13.125%) is equal to the GILTI “breakeven rate” of foreign tax. It appears that Congress believed that such tax parity, if imposed on a sufficient (deemed) amount of intangible income, would incentivize more domestic corporations to serve foreign markets directly, rather than through CFCs.

The FDII rate can only match the GILTI breakeven rate on the same (or equivalent) amount of cross-border transportation income, however, if 100 percent of the income from provision of the service is treated as FDDEI. The policy-based apportionment method discussed in the comment letter produces this result in all cases; the predominant location method produces this result in many cases if the threshold is reasonably set; a 50:50 method can never produce this result.

The 50:50 method's shortcomings are particularly impactful when applied to a taxpayer in a capital intensive business, whose relatively higher amounts of QBAI produce relatively lower (deemed) amounts of intangible income that qualify for the preferential rate. Such taxpayers would, inversely, have relatively higher (deemed) amounts of tangible income with respect to which there remains a tax disparity depending on whether that income is earned domestically or abroad (i.e., 21% if earned in the United States as opposed to potentially no U.S. tax, when earned by a foreign subsidiary). Therefore, particularly in capital intensive cases, failure to provide tax parity vs GILTI on the intangible income exacerbates the existing disparity that already exists with respect to the taxation of the tangible income return. We therefore believe that, particularly in capital intensive businesses like cross-border transportation services, that it is imperative that any rules strive for tax parity with GILTI on the intangible income to minimize what will continue to be a disincentive to operate onshore.

We would also like to note that we do not believe that section 863(c) is an appropriate analog to FDII when considering an FDDEI apportionment methodology. Section 863(c) addressed foreign tax credit limitation concerns that arose with respect to income that was previously sourced outside the United States but not within any foreign taxing jurisdiction. This concern is unrelated to section 250, whose FDDEI sales and services requirements (i.e., foreign use and location of the service recipient, respectively) are distinct from the income sourcing rules that apply to such income (i.e., place of production and location of service provider, respectively). Furthermore, we believe the section 863(c) approach, at least if adopted as a stand-alone method, is antithetical to the policy rationale underlying the enactment of the FDII regime as articulated above, as it would, in no case, result in tax parity with GILTI treatment.

Please let me know if you have any further questions related to our thinking on FDII for the transportation industry. We would be happy to join another meeting or call, or facilitate a call with some transportation companies to further discuss their operations.

Happy Thanksgiving!

Best regards,

Mike

Michael DiFronzo
PricewaterhouseCoopers LLP
Washington, DC

DOCUMENT ATTRIBUTES
Copy RID