Software Group Looking for Changes in FDII, GILTI Regs

July 7, 2019

Mr. David Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Mr. Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

Mr. L.G. “Chip” Harter
Deputy Assistant Secretary
International Tax Affairs
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20224

Mr. Michael Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20220

Mr. Jeffrey Van Hove
Senior Advisor, Regulatory Affairs
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Re: Proposed § 250 FDII regulations in REG-104464-18

We are writing on behalf of the Software Coalition¹ to address certain aspects of the proposed regulations (the “Proposed Regulations”)² concerning the foreign-derived intangible income (“FDII”) regime under § 250 of the Code as they relate to software transactions.³ In the preamble to the Proposed Regulations (the “Preamble”), Treasury and the Service requested comments “on all aspects of the proposed regulations.”⁴

The U.S. software industry is one of the country's leading sectors for exports of products and services. Our members employ a very substantial number of Americans.

We recognize and appreciate the considerable thought that underlies the Proposed Regulations. Due to the sometimes unique nature of software transactions, however, we believe that improvements can be made to the Proposed Regulations to address (i) the inconsistent treatment between global enterprise licenses and global SaaS agreements, and (ii) provide more realistic documentation requirements that are more consistent with how software companies do business globally. We also note that the Proposed Regulations are not entirely consistent with Treas. Reg. § 1.861-18 (the “Software Regulations”) which determine the classification for certain federal income tax purposes of transactions involving the transfer of computer programs. The Software Coalition appreciates the opportunity to provide input on these important issues.

This letter will (i) describe typical software user distribution models, (ii) note where the Proposed Regulations create asymmetrical results and unintended consequences between software sales and service transactions which otherwise are economically very similar, and (iii) propose amendments to specific provisions in the Proposed Regulations.

1. Typical software user distribution models

In order to assist Treasury and the Service to provide guidance that is appropriate in the context of modern software distribution arrangements, we would like to first describe the most significant distribution models followed by U.S. software companies.

An “enterprise license” is a commercial agreement in which the transferee receives the right to distribute software to its employees at multiple locations within the transferee's global enterprise. The software supplier provides one or more copies of the software, which is then installed by the user on the user's hardware. The terms of use may be perpetual or time limited. The compensation may be a flat price, fee per copy installed, flat fee with a user headcount cap, or other arrangement. In economic substance, an enterprise license is a bulk sale or lease of copyrighted articles to be used throughout the customer's global enterprise.

“SaaS access transactions” refer to the provision of software functionality to remote users in which consumers are provided access to application software running on a cloud infrastructure. The application software may be accessible from various customer devices. Users do not manage or control the underlying cloud infrastructure which hosts the software applications, with the possible exception of limited user-specific application configuration settings. Typical SaaS offerings include large enterprise applications, such as CRM, sales automation, and accounting systems, as well as cloud-based desktop application suites. SaaS offerings are almost always priced on a periodic subscription basis.

For purposes of our analysis below, we have considered how the documentation requirements of the Proposed Regulations should apply to the following representative transactions:

2. The rules for foreign use of intangible property should be consistent with the rules for foreign use of general property

Congress did not draw a distinction between tangible and intangible property when it drafted section 250. Section 250(b)(5)(A) defines “foreign use” of property to mean “any use, consumption, or disposition which is not within the United States.” Moreover, section 250(b)(4) simply states that foreign-derived deduction eligible income (“FDDEI”) means “any deduction eligible income . . . derived in connection with property which is sold by the taxpayer to any person who is not a United States person.” Therefore, the rules governing foreign use of property should be consistent regardless of the kind of property in question.

Prop. Treas. Reg. § 1.250(b)-4(e)(1) and (e)(2) limit the type of use that should qualify as “foreign use” by providing that “[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.”⁵ As currently drafted, the definition of “foreign use” with respect to intangible property at Prop. Treas. Reg. § 1.250(b)-4(e)(2) limits the types of uses that qualify as foreign uses of intangible property to only those uses that are revenue generating. There are many uses of intangible property that would seemingly qualify for FDDEI Sales treatment under the statute but not under the Proposed Regulations because of the Proposed Regulations' limited focus with respect to foreign use. For example, a purchaser may use intangible property in a way that leads to the development of new intangible property. This type of use might not necessarily constitute revenue-generating use but nonetheless should qualify as a “foreign use” within the plain meaning of section 250.

The Preamble justifies separate rules in the Proposed Regulations for general property and intangible property based on footnote 1522 of the Conference Report.⁶ The footnote provides:

[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.

The Preamble quotes footnote 1522 and assets that 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.⁷ The Preamble then requests comments on whether a rule for intangible property similar to Prop. Treas. Reg. § 1.250(b)-4(d)(2))(i)(B) is appropriate.⁸

We interpret footnote 1522 differently than drafters of the Preamble and the Proposed Regulations. Footnote 1522 only confirms the plain meaning of section 250(b)(5)(a) that a sale of property for manufacturing or other processing outside the U.S. is a sale for foreign use. Footnote 1522 provides a good example of one type of sale for foreign use. It doesn't provide any reason, however, to bifurcate property into tangible (general) and intangible categories. In the software context, a license of software reproduction rights to a foreign person for reproduction and sale of copies (clearly a transaction in intangible property) should be treated as for a foreign use, equally to the transaction described in Footnote 1522. Accordingly, we recommend that Treasury and the Service remove the distinction between general and intangible in Prop. Treas. Reg. § 1.250(b)-4 and clarify that a sale of property is for a foreign use if the property is used outside the United States within the meaning of section 250(b)(5)(a) (i.e., “any use, consumption, or disposition which is not within the United States).

Pursuant to our recommendations below and further to our recommendation that Treasury and the Service remove the distinction between tangible and intangible property, the types of information that should be sufficient to show foreign use should be consistent for all types of property.

3. Avoid conflict between the “intangible property” definition in the Proposed Regulations and the Treas. Reg. § 1.861-18 classifications of software transactions

If Treasury and the Service do not adopt our recommendation immediately above to eliminate the distinction between general and intangible property in Prop. Treas. Reg. § 1.250(b)-4, we suggest certain changes to the Proposed Regulations to ensure their conformity with the Software Regulations. Specifically, we suggest that software transactions involving the sale or lease of copyrighted articles be governed by the rules that apply to “general property”, and not by the rules that apply to “intangible property”. Conforming the Proposed Regulations with the Software Regulations would provide certainty to taxpayers and avoid potential controversies regarding the proper characterization of transactions involving computer software.

Further we note that licenses may be granted for the provision of services by licensees and not just for the production of goods. The proposed language in Prop. Treas. Reg. § 1.250(b)-4(e)(2) refers only to licenses for the manufacture and sale of goods. Therefore, we recommend that if the intangible and general property distinction is preserved, Treasury and the Service include a reference to licenses for the provision of services.

The Software Regulations set forth the long-standing analytical framework for the U.S. federal income tax treatment of software transactions.⁹ Although the Software Regulations by their terms apply only for purposes of subchapter N of chapter 1 of the Internal Revenue Code (sections 861 through 1000, including the source of income rules) and to certain other enumerated sections of the Code (including section 482 and chapter 3, relating to withholding), they provide clear guidance to taxpayers regarding the distinction between transactions involving copyright rights and transactions involving copyrighted articles. For example, the Software Regulations settled issues regarding whether revenue from transactions involving various types of so-called “user agreements” for software constituted a license of intellectual property or the sale of personal property.

As relevant to the Proposed Regulations, the Software Regulations set forth four categories of transactions: (i) a sale of a copyright right; (ii) a license of a copyright right; (iii) a sale of a copyrighted article; and (iv) a lease (or rental) of a copyrighted article.¹⁰ A copyright right includes, among other things, the right to make copies of a computer program for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease, or lending.¹¹ A copyrighted article includes a copy of a computer program.¹² Under the framework of the Software Regulations, the first two categories of transactions are characterized as transactions involving intangible property, whereas the latter two categories of transactions are characterized as transactions in copyrighted articles, i.e., not involving intangible property.

Section 250(c)(5)(E) provides that, for purposes of section 250(b), the terms “sold”, “sells”, and “sale” include any lease, license, exchange, or other disposition. Therefore, foreign-derived deduction eligible income (“FDDEI”) includes, for example, the license of intangible property that otherwise meets the requirements for FDDEI. Section 250 does not define “intangible property” for purposes of the FDII rules. However, Prop. Treas. Reg. § 1.250(b)-3(b)(4) defines “intangible property” by reference to section 367(d)(4), including a copyright.

Examples 4 and 5 in Prop. Treas. Reg. § 1.250(b)-4(e)(4) apply the rules for intangible property to certain limited use licenses of copyrighted computer software. Under the facts of both examples, DC provides FP with a “limited use license to copyrighted computer software” in exchange for an annual fee of $100x. The limited license restricts FP's use of the software to 100 of its employees and prohibits FP from using the software in any way other than as an end-user, including a prohibition on sublicensing, selling, reverse engineering, or modifying the computer software. The analysis section of example 4 states that FP “exploits” the software in the locations where its employees use the software. Applying the rules for sales of intangible property, the example concludes that, based on FP's annual report (which indicates that all of FP's employees are physically located outside the United States) all revenue from the software is earned outside the United States, the license is for a foreign use, and is therefore a FDDEI sale. Example 5 provides a similar analysis.

To be consistent with the Software Regulations (and if our recommendation to remove the distinction between general property and intangible property is not adopted), however, we suggest that examples 4 and 5 should be properly analyzed under the rules for sales of general property, rather than under the rules for intangible property. The facts in examples 4 and 5 involve leases of copyrighted articles, transactions that the Software Regulations characterize as not transactions in intangible property because no copyright rights (as defined in the Software Regulations) are transferred by DC to FP. Within the framework of the Software Regulations, FP would not be viewed as having any rights to “exploit” the software under the terms of the limited use license.

Transactions involving transfers of copyright rights to computer software, such as a reproduction license, would continue to be analyzed under the rules for intangible property. For example, we believe that example 1 in Prop. Treas. Reg. § 1.250(b)-4(e), involving the license of worldwide rights to the copyright to a composition in exchange for annual royalties, is properly classified as an intangible property transaction and would apply equally to the license of copyright rights in respect of software.

If Treasury and the Service decide not to adopt our suggestion in this section to maintain conformity with the Software Regulations, then we respectfully request that Treasury and the Service include an operative rule (or at least a clear statement in the preamble to the final FDII regulations) explaining that the characterization of transactions as involving “intangible property” in these regulations is strictly limited to applying section 250 and the regulations thereunder, and not for any other purpose.

4. Predominant character rule

Prop. Treas. Reg. § 1.250(b)-3(e) provides that if a transaction includes both a sale component and a service component, the transaction is classified according to the overall predominant character of the transaction for purposes of determining whether the transaction is subject to Prop. Treas. Reg. §§ 1.250(b)-4 or -5 (the “Predominant Character Rule”).

In general, we endorse the Predominant Character Rule and consider that result to be a thoughtful response to the challenge of mixed transactions. Many software transactions include both property and service elements. For example, the sale of a software program which is downloaded to the user's device, but also allows the user to access some functionality hosted in the cloud, exhibits elements of both property and service transactions. A rule requiring bifurcation in all cases would be exceedingly difficult to administer. There should be no need to bifurcate the transaction for FDII purposes in any event, as in any event the revenue should qualify as a FDDEI sale if the user is outside the U.S.

In some cases, however, financial reporting standards now require U.S. taxpayers to disaggregate a transaction that contains both sale and service components. Pursuant to FASB's new revenue recognition standard, ASC 606 (Revenue from Contracts with Customers), some Software Coalition members are required to disaggregate transactions with sale and service components in their financial reporting under U.S. GAAP, even if the transaction is not disaggregated commercially. For example, a domestic corporation may contract with a foreign customer to provide hardware with installed software, with respect to which the supplier agrees to provide services to maintain and update the software installed on the hardware. This transaction may be governed by a single commercial contract but the supplier may be required to disaggregate the sale and service components of the transaction. Accordingly, we request that the Proposed Regulations be modified to allow taxpayers to elect to follow their GAAP accounting for transactions which contains both sale and service components. Aligning the requirements of the FDII rules with financial statement requirements would help to ease U.S. suppliers' administrative burdens.

5. The discontinuity between global enterprise licenses and SaaS access arrangements should be eliminated

Enterprise licenses and SaaS access transactions are both distribution models under which U.S. software companies supply their software to enterprise and individual users. In the former case, the software copy is delivered to the user for the user to install on its own equipment or device. In the latter case, the software application is hosted by the supplier on the supplier's own equipment. In both cases, the software company is commercializing the investment made in its development of the software application. Also in both cases, in sales to enterprises, employees throughout the customer's organization may be authorized to use the software. The principal difference between the two models is just the delivery method.

Despite the similar economic circumstances of these two distribution models, the Proposed Regulations would appear to treat these two transactions with U.S. customers (but not foreign customers) very differently. In the case of a SaaS transaction with a U.S. customer, the supplier is able to prove the portion of foreign use under the FDDEI Services rules by demonstrating what portion of the services benefit the user's foreign operations.

In the case of a sale of a global enterprise license to a U.S. person, however, we are concerned that it might be argued that this type of global sales transaction does not qualify as a FDDEI Sales transaction because the contract of sale would not be with a “foreign person” within the meaning of Prop. Treas. Reg. § 1.250(b)-4(c). There is not an explicit “look-through” rule in the Proposed Regulations that allows a domestic corporation to look-through to the location of end-users and disregard the fact that the direct contracting counterparty for the property sale is not a foreign person. The absence of a look-through rule produces results that are inconsistent with the FDDEI Services rules. For services transactions such as SaaS access transactions, Prop. Treas. Reg. § 1.250(b)-5(e)(4) explicitly provides the look-through rule for FDDEI Services purposes by defining “business recipient” to include “a reference to any related party of the business recipient” (the “FDDEI Services Look-Through Rule”).

We can suggest several approaches to cure this asymmetry.

First, Treasury and the Service should recognize and acknowledge that a global enterprise licensing transaction (e.g., Transactions 1 and 2 in Section 1 of this letter) essentially is a mass sale of numerous copyrighted articles to the various constituent elements of the purchaser's group, and not a sale of a single software copy to the U.S. contracting customer entity. The nature of the mass sale is shown by the fact that all users normally will be bound by a contract with the software supplier, namely the end user license agreement (“EULA”). The EULA is a commercial contract between the domestic software supplier and each of the persons bound by the EULA. In the software context, the EULA should be sufficient to qualify the foreign portion of a global enterprise license as a foreign sale within the meaning of Prop. Treas. Reg. § 1.250(b)-4(b). In other words, the existence of the EULA binding foreign users of the global enterprise should constitute a “sale of general property . . . to a foreign person under that regulation.” We recommend that Treasury and the Service include a rule or an example to the FDDEI Sales provisions that explicitly applies this treatment.

We note that Treasury and the Service were comfortable creating an express special rule in the exception for foreign military sales in Prop. Treas. Reg. § 1.250(b)-3(c) (the “Foreign Military Sales Exception”). That proposed exception provides that a sale (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.¹³ The Foreign Military Sales Exception operates by treating a contract for the sale of property (or provision of a service) to the U.S. government or an instrumentality thereof and the resale (or on-service) to a foreign government or agency or instrumentality thereof as a sale of property (or provision of a service) directly to the foreign government.¹⁴

The Foreign Military Sales Exception proves that Treasury and the Service have considered it appropriate to include explicit rules for certain industries that may be inequitably impacted by the Proposed Regulations. In the case of software enterprise licenses, it is not even necessary to create an express exception to the statutory rule. Instead, the most appropriate approach would be to recognize the mass sale nature of enterprise licenses. That rule could be limited solely for purposes of applying the definition of a FDDEI sale under Prop. Treas. Reg. § 1.250(b)-4(b).

This asymmetric treatment between sales and services transactions also exists for global reproduction licenses entered into with U.S. licensees, such as in Transaction 6. Unlike in the case of a global enterprise license with a user, this transaction is not characterized as a mass sale of copies under Treas. Reg. § 1.861-18. Instead, the transaction is characterized as a license of intangible property giving rise to royalty income.

We do not believe that there is a sound policy reason to treat property transactions with direct U.S. contracting parties differently than service transactions with direct U.S. contracting parties. Accordingly, we recommend that Treasury and the Service draft and include a FDDEI Sales look-through rule to fix the asymmetry. The look-through rule could apply to transactions where substantially similar economic results arise from the same commercial transaction entered into with foreign persons. Unless Treasury and the Service adopt a look-through rule for FDDEI Sales purposes or another measure that would more accurately reflect the extent to which the software may be exploited inside and outside the U.S., the Domestic Corporation in Transaction 6 is prevented from securing a section 250 deduction.

6. The Proposed Regulations should be revised to make permanent the Transition Documentation Rule at Prop. Treas. Reg. § 1.250-1(b).

We believe that the requirements of the Proposed Regulations to document status as a foreign person and to establish foreign use of general property are too limited and too prescriptive. We suggest that the most important fact for a U.S. software supplier to be able to prove is that some or all of the software installations are to be used by foreign persons. In most cases, software suppliers regard the location of their users as an important business fact. Accordingly, normal business processes frequently will provide information to the software supplier as to the location of users in both enterprise license and SaaS access transactions.

The statute itself authorizes the Secretary to allow taxpayers considerable flexibility as to how the taxpayer can prove that property is sold for a foreign use, or that services are provided to persons not located in the United States. The Proposed Regulations depart from the statutory expression of reasonableness to impose mandates under which FDII eligibility can be established only if the taxpayer provides documentation of a particular sort. Much of the documentation prescribed in the Proposed Regulations would not be generated by U.S. software companies in the ordinary course of business.

Instead of a narrow prescriptive rule that doesn't reflect the variety of business circumstances, we suggest that the final regulations retain the transition documentation rule of Prop. Treas. Reg. § 1.250-1(b). That rule provides that 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 Prop. Treas. Reg. § 1.250(b)-4(d) and (e)), or a recipient of a general service is located outside the United States (within the meaning of Prop. Treas. Reg. § 1.250(b)-5(d)(2) and (e)(2)) (the “Transition Documentation Rule”). The Transition Documentation Rule applies in lieu of the documentation required in Prop. Treas. Reg. §§ 1.250(b)-4(c)(2), (d)(3), and (e)(3), and 1.250(b)-5(d)(3) and (e)(3), provided that the documentation meets the reliability of documentation requirements described in Prop. Treas. Reg. § 1.250(b)-3(d) (the “Reliability Requirements”).

The Reliability Requirements provide that documentation is reliable only if each of the following requirements are met:

Coalition members observe that it is unlikely that third party customers to software transactions would provide documentation meeting most of the requirements imposed by Prop. Treas. Reg. § 1.250(b)-4 through -6. Further, we believe that the Transition Documentation Rule provides sufficient auditable guideposts to protect the government's interests in administering Section 250.

The Transition Documentation Rule's standard of “any reasonable documentation maintained in the ordinary course of the taxpayer's business” avoids imposing on software suppliers a need to impose contractual conditions or make inquiries of their customers which could interfere with the customer relationship. Many of the information items that the Proposed Regulations demand that suppliers collect from users normally would have to be collected, if at all, at the time of negotiating a sales contract. The period of contract negotiation up to the final contract execution is a highly dynamic period, with the supplier anxious not to introduce elements into the negotiation which might interject barriers to the transaction.

In negotiations between software vendors and their customers, customers will always resist providing information relating to their internal business affairs. Thus, demanding that information will introduce significant friction to the sales process to the detriment of members of the Software Coalition. When software vendors are in the process of making a sale, various factors impact the software suppliers' ability to negotiate price and terms with prospective customers. The sales process is not an appropriate context for software suppliers to request proprietary business information from prospective customers. Indeed, arm's length customers would never be interested in sharing internal, proprietary data with their software vendors.

We note that Prop. Treas. Reg. § 1.250(b)-5(e)(3)(c) allows consideration of documentation “obtained in the ordinary course of business” to establish the location of business recipients which benefit from services. We suggest that a similar approach be adopted for sales of property.

It is unlikely that in Transactions 1 through 6 the Domestic Corporation would be able to collect from recipients information regarding where they plan to use the product in question if the only type of information that is sufficient under the Proposed Regulations is the type currently described in Prop. Treas. Reg. § 1.250(b)-4 through -6. Indeed, Software Coalition member companies do not typically provide the type of information currently described in Prop. Treas. Reg. § 1.250(b)-4 through -6 to their vendors when they purchase products or services.

7. If the Transition Documentation Rule is not made permanent, we recommend that the Proposed Regulations specify that the documentation rules similar to those for sales of fungible mass in Prop. Treas. Reg. § 1.250(b)-4(d)(3)(iii) apply to software transactions.

Prop. Treas. Reg. § 1.250(b)-4(d)(3)(iii) provides in lieu of the general documentation requirements for determining the foreign use for sales of general property, where a domestic corporation sells multiple items of general property, which because of their fungible nature cannot reasonably be specifically traced to the location of use, 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 (the “Fungible Mass Rule”). The Proposed Regulations also contain a de minimis rule that 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.¹⁶ If the seller does not obtain documentation establishing that 10 percent or more of the fungible mass is for a foreign use, then no portion of the fungible mass is treated as for a foreign use.¹⁷

We commend Treasury and the Service on what is a sensible approach to a common problem. This rule provides flexibility with respect to the documentation required to show that a portion of fungible property is for a foreign use.

Software products exhibit essentially the same economic characteristics as the property subject to the Fungible Mass Rule, in that each copy of a software program which may be installed pursuant to an enterprise license will be identical. There is no difference between the copy which might be installed in one location compared to another. Accordingly, we recommend that Treasury and the Service apply the Fungible Mass Rule to software transactions if the Transition Documentation Rule is not adopted as the permanent rule as requested above.

8. Continuing Contracts

In many cases, software agreements will continue beyond one taxable year. It is very common for enterprise or SaaS agreements to be for a term of years. In other cases, enterprise or SaaS agreements may be renewable. In some licensing models, the purchaser may be allowed to substitute users or the products to which access is allowed, as long as overall limits established under the contract are not exceeded.

The final regulations should provide that the taxpayer may document the anticipated foreign use based on contemporaneous evidence at the time the contract is formed, but should not require suppliers to track and update the foreign use estimates over time. In force and controlling contracts, even if entered into in earlier years, should be considered reliable for purposes of these regulations. If necessary to protect the government's interests, that rule could be qualified by a statement that the taxpayer does not know and does not have reason to know of material changes in the subsequent years.¹⁸ This would reduce the administrative burden on taxpayers and the government.

9. Licenses to Distribute Services

Prop. Treas. Reg. § 1.250(b)-4(e)(2) provides rules for determining when a sale of intangible property is for foreign use. That paragraph refers to licenses for sale or distribution of a "product", but there is no reference to a license for the distribution of a service. A software developer which develops a SaaS offering to be supplied by others may license the application and distribution rights to that other party to host and provide access to the SaaS application. This type of commercial transaction is even more common in the area of digital services, where the owner of intangible property may license another party to provide the digital services.

Accordingly, if the distinction between general and intangible property is retained, we suggest that clarifying language be added to Prop. Treas. Reg. § 1.250(b)-4(e)(2)(i), as follows: "For intangible property used for the provision of services, the intangible property is treated as exploited based on the location in which legal rights are provided, including where there is not an explicit right granted by a governing authority (e.g., patent or trademark) and such intangible property is protected by the terms of the contract and other applicable law." Additionally, this paragraph should make explicit that services are not included in the definition of “product” in this provision. We recommend this clarification as it would make the documentation for this provision more administrable. The license or sale contract pursuant to which the intangible property is transferred typically would identify the geographical territories in which the legal rights are provided. Additionally, this approach would align the tax law treatment with the intangible property law consequences to the company. This is an inherent safeguard for the government, since companies are careful not to enter into contracts that jeopardize their intangible property rights.

10. Business-to-Consumer (“B2C”) Transactions

U.S. software companies are very familiar with the proof of location required under various VAT and similar regimes around the world which apply to U.S. software companies selling digital goods and services into those jurisdictions. Reasonable business documentation of foreign use should include any of the indicia which typically are required under those regimes, such as IP address, credit card issuer location, mobile phone number, or other geolocation information. These documentation examples align with the documentation requirements under EU VAT and similar regimes. U.S. software companies should be able to prove foreign use through the same indicia that they are already use for VAT compliance purposes. These indicia are more appropriate in the software context than the general documentation requirements in Prop. Treas. Reg. §1.250(b)-4(c)(2) or the small transactions rule in Prop. Treas. Reg. §1.250(b)-4(d)(3)(ii)(B).

* * *

We would be pleased to answer any questions you may have regarding the topics raised in this letter. The Software Coalition is grateful for the opportunity to provide comments on the Proposed Regulations, and we hope that the above comments will be taken into account in revising the Proposed Regulations.

In addition, the Coalition requests the opportunity to testify at the public hearing regarding the Proposed Regulations (REG-104464-18). The statements at the hearing will relate to the comments submitted in this letter, and other topics pertinent to the proposed regulations.

Sincerely,

Gary D. Sprague
Partner
(650) 856-5510

Rafic H. Barrage
Partner
(202) 452-7090

Steven Smith
Associate
(415) 984-3818

Baker & McKenzie LLP
Washington, DC

cc:
Mr. Douglas Poms, International Tax Counsel
Mr. Jason Yen, Attorney-Advisor, International Tax Counsel
Mr. Peter Blessing, IRS Associate Chief Counsel (International)
Ms. Melinda E. Harvey, Office of the Associate Chief Counsel (International)
Mr. Michael Kaercher, Office of the Associate Chief Counsel (International)

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Appendix A
Software Coalition Members

Adobe Inc.

Amazon.com, Inc.

Autodesk, Inc.

BMC Software, Inc.

Broadcom Corporation

Cisco Systems, Inc.

Electronic Arts Inc.

Dell/EMC

Facebook, Inc.

GE Digital

IBM Corporation

Mentor Graphics Corporation

Microsoft Corporation

Nuance Communications, Inc.

Oracle Corporation

Palo Alto Networks, Inc.

Parametric Technology Corporation

Pivotal Software, Inc.

ResMed Inc.

Salesforce.com, Inc.

SAP America, Inc.

Symantec Corporation

Synopsys, Inc.

VMware, Inc.