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Is FDII Really the Carrot It Was Meant to Be?

Posted on Dec. 23, 2019
[Editor's Note:

This article originally appeared in the December 23, 2019, issue of Tax Notes Federal.

]
Jesus Mijangos Castro
Jesus Mijangos Castro

Jesus Mijangos Castro is a tax professor for Universidad de las Américas Puebla Jenkins Graduate School in San Andres Cholula, Mexico. He obtained his LLM in taxation at Georgetown University Law Center.

In this article, Mijangos Castro compares the United States’ foreign-derived intangible income deduction with previous regimes that offered incentives for exports or domestic production.

I. Introduction

The Tax Cuts and Jobs Act created a hybrid U.S. international tax system: part worldwide, part territorial. Consequences of this impending new system prompted Congress’s enactment of section 250, specifically section 250(a)(1)(A), the foreign-derived intangible income deduction. Under section 250, domestic corporations may deduct an amount equal to 37.5 percent of FDII for the year, and 50 percent of the sum of their global intangible low-taxed income for the year and the amount treated as a dividend under section 78 attributable to their GILTI.1 The purpose of the FDII deduction is to provide a lower effective U.S. tax rate for foreign-market sales and services related to intangible property owned in the United States.2

The FDII deduction uses previous U.S. tax export and domestic manufacturing incentive regimes as a foundation, leading to important similarities that help construe a more holistic understanding of the FDII deduction and its pending application. Over the past 60 years, the United States provided various tax incentives to domestic corporations in connection with outbound sales and services as well as domestic manufacturing. Congress enacted the domestic international sales corporation regime with that goal in 1971.3 Pushback from the General Agreement on Tariffs and Trade resulted in Congress’s replacing that regime with the foreign sales corporation regime in 1984, which Congress then replaced after hard criticism with the exclusion from gross income for extraterritorial income (ETI) in 2001. ETI remained in place until 2007, when it was displaced by section 199, relating to income attributable to domestic production activities. Each regime replicated the previous one in one aspect or another, and all contained the same underlying tones.

Under the TCJA a clear statute displacing section 199 is not present in some respects; however, the FDII deduction shares similarities with these preceding regimes. On March 4, Treasury issued the long-anticipated proposed regulations pertaining to the FDII deduction. Taxpayers await the release of the final regulations concerning section 250. During this intermittent stage a review of the proposed regulations leads to a general understanding of the current domestic production incentive regime. Experience with these legacy regimes appears necessary to optimize the FDII deduction, especially when some favorable provisions are not present in this supposed carrot of tax reform.

II. The FDII Deduction

The FDII deduction represents the latest framework providing domestic corporations a tax incentive for U.S.-based foreign market activity. The deduction is a deemed return on U.S.-based intangible assets calculation and represents 37.5 percent of FDII of a domestic corporation for the year, effectively taxing FDII at a rate of 13.125 percent (rather than 21 percent).4 The TCJA created the new term “FDII,” defining it as the portion of a domestic corporation’s return in excess of a return on tangible assets derived from serving foreign markets.5 The FDII deduction is complicated to compute because domestic corporations must first determine FDII. FDII results from a formula consisting of three variables. Specifically, FDII is the product of a domestic corporation’s deemed intangible income (DII) for the year multiplied by the corporation’s foreign-derived ratio for the year6:

Figure

The foreign-derived ratio is the ratio (not to exceed 1) of the corporation’s foreign-derived deduction-eligible income (FDDEI) to deduction-eligible income (DEI).7

A. DEI

The first variable the domestic corporation must calculate is DEI, the denominator of the foreign-derived ratio. DEI is a gross-income-to-net-income concept. A domestic corporation must exclude the following six items from its total gross income to determine gross DEI: subpart F income; GILTI; any financial service income (as defined in section 904(d)(2)(D)); any dividend received from a controlled foreign corporation; any domestic oil and gas income; and any foreign branch income (as defined in section 904(d)(2)(j)).8 The domestic corporation reduces its gross DEI by expenses, losses, and other deductions (referred to collectively as deductions) properly allocable to gross DEI to compute DEI.9

B. FDDEI

The next step is determining the numerator of the foreign-derived ratio, FDDEI. For purposes of the FDII equation, FDDEI is the excess (if any) of the corporation’s gross FDDEI for the year over deductions properly allocable to gross FDDEI for the year.10 Gross FDDEI is the portion of gross DEI of the domestic corporation for the year attributable to FDDEI transactions (sales or services).11 Hence, FDDEI is any DEI derived in connection with property sold by the domestic corporation to any person who is not a U.S. person, and is for foreign use; or services provided to any person or regarding any property not located in the United States.12 The term “sold” includes lease, license, exchange, or other disposition; “foreign use” means any use, consumption, or disposition not in the United States.13

Gross DEI not included in gross FDDEI is a domestic corporation’s gross non-FDDEI.14 All income included in gross DEI is included in either gross FDDEI or gross non-FDDEI.15

C. DII

The last variable of the FDII equation is the domestic corporation’s DII. This is the domestic corporation’s DEI less the corporation’s deemed tangible income return (DTIR) for the year.16 DTIR is an amount equal to 10 percent of the domestic corporation’s qualified business asset investment, as defined in section 951A.17

In general, QBAI is the average of the domestic corporation’s aggregate adjusted bases in specified tangible property at the close of each quarter of the tax year.18 Specified tangible property is all property used in the production of gross DEI.19 For FDII, tangible property means property for which the depreciation provided by section 167(a) is eligible to be determined under section 168.20

Once the domestic corporation’s QBAI amount is determined, DII is derived. After deriving each variable, the corporation calculates FDII and compares this with the taxable income limitation.21 Unless subject to the limitation, the corporation receives a 37.5 percent deduction of its FDII amount from U.S. federal taxable income.

D. Nuances of the FDII Calculation

The general rules require other considerations to compute the appropriate FDII deduction. Also, the computation requires close attention to allocation and apportionment of deductions; FDII items of all members of the same consolidated group; other code provisions subject to the same taxable income limitation; and FDDEI transaction substantiation requirements.

The choice of deduction allocation and apportionment methods is integral throughout the entire FDII calculation. The determinations of FDDEI and non-FDDEI require the reasonable allocation and apportionment of deductions. Operative sections deductions, as defined under reg. section 1.861-8(f), are allocated and apportioned under reg. section 1.861-8 through -14T and -17.22 Further, the corporation must use the same allocation and apportionment methods for all other operative sections.23 Importantly, each year the corporation should make a facts and circumstances determination to justify the allocation and apportionment methods selected for the computations of FDDEI and non-FDDEI.

The FDII deduction is available to all members of a consolidated group; however, the determination of FDII is by reference to the relevant items of all members of the same consolidated group.24 Thus, the computation of FDII requires the aggregation of DEI, FDDEI, and DTIR of all members of the consolidated group.25 Then the consolidated group uses the aggregate variables and taxable income to calculate FDII.

Before computing the FDII deduction, a domestic corporation must form a tentative FDII deduction under section 250, before the business interest expense under section 163(j) and net operating loss under section 172(a).26 This requirement acts in conjunction with other sections that limit the availability of a deduction based on taxable income.27 After computing the tentative section 250 deduction, the corporation must calculate its amount of business interest allowed under section 163(j),28 and then compute its NOL amount.29 After the sections 163(j) and 172(a)(2) calculations, the corporation computes its final FDII deduction.

FDDEI transactions have considerably high reliability and documentation standards. Section 250 generally requires a domestic corporation to document (as applicable) that a purchaser is a foreign person and that property is sold for a foreign use; it also must document the location of persons to whom (or property for which) the domestic corporation provides services.30 Some documentation rules change regarding specific property sales and provision of services.31 Also, each transaction requires the following reliability requirements: (1) as of the FDII filing date (that is, due date of the return, with extensions), the seller or renderer “does not know and does not have reason to know” that the documentation is “unreliable or incorrect”; (2) the documentation must be obtained by the seller or renderer by the FDII filing date; and (3) the documentation must be obtained by the seller or renderer no earlier than one year before the date of the sale or service.32 Domestic corporations must consider the substantiation required for each FDDEI transaction throughout the year.

III. History of Statutes Similar to FDII

A. Overview of Previous Incentive Tax Regimes

In 1971 the U.S. government enacted the DISC regime to stimulate U.S. exports and encourage domestic corporations to locate their production activities in the United States.33 Under these provisions domestic corporations formed domestic subsidiaries and elected DISC status to exempt from U.S. federal taxable income a percentage of profits on sales of “export property,” known as foreign base company income.34 The DISC regime provided deferral for any income attributed to a DISC until remitted to its parent as a dividend, disposal of DISC stock, or the termination of the DISC entity.35 The DISC regime provided domestic corporations with many opportunities to maximize their benefit and truly incentivized corporations to focus on exportation.

A little more than a decade after enactment of the DISC regime, the FSC regime replaced it in 1984. The U.S. government designed this regime to continue incentives for exportation while achieving GATT legality.36 The FSC regime afforded a favorable tax benefit to domestic corporations, as with the DISC regime; however, the FSC provisions contained more requirements for a subsidiary to qualify as a FSC.37 The FSC regime exempted a portion of foreign trade income (FTI), income derived from foreign trading gross receipts (FTGR),38 from taxation for these foreign subsidiaries.39

In 2001 the ETI regime superseded the FSC.40 The ETI regime provided a tax benefit similar to that of the FSC, exempting 15 percent through 30 percent tax to a limited category of income from foreign operations.41 Section 114(a) allowed domestic corporations to exclude extraterritorial income from gross income,42 and section 114(e) defined ETI as gross income attributable to FTGR.

Section 199, which displaced ETI, benefited income attributable to domestic production activities; it was a manufacturing — rather than export — tax incentive regime. It allowed domestic corporations a deduction equal to a percentage of the company’s profits when it derived net income from qualifying production activities.43

B. Property Qualification Requirements

Under the DISC regime, property qualified as export property when it met the destination and content tests. The destination test required manufacturing to be in the United States, the product to be held primarily for export, and physical delivery of the product to be outside the United States, without further processing, within one year of the sale or lease.44 The content test required that not more than 50 percent of the fair market value of this export property be attributable to imports brought into the United States.45

In the FSC regime, income qualified as FTI when derived from the sale of export property outside the United States.46 The FSC provisions required domestic corporations to meet several tests: a destination test, a foreign-use test, and a content test. The destination test required that the United States be the last place of manufacturing, and delivery of the product be outside the United States.47 The content test required that no more than 50 percent of the property’s foreign content value be attributable to articles imported into the United States.48 Whether any of the above conditions existed depended on the property sold, delivery abroad, and ultimate use outside the United States.49

The ETI regime prescribed three tests for income to constitute FTGR.

First, it required income derived from specific foreign activities, including the sale or lease of qualifying foreign trade property, or services related to qualifying foreign trade property.50 Second, section 942 required gross receipts derived from a transaction involving qualifying foreign trade property. For qualification as such, section 942 required the property to be manufactured, produced, grown, or extracted outside the United States as well as being held primarily for sale or lease outside the United States.51 Also, a content test applied, requiring no more than 50 percent of the property attributable to foreign content.52 Third, the regime required domestic corporations to perform specific economic processes outside the United States.53

The property qualifications under section 199 differed from the previous regimes. Property created from qualifying activities included any activities relating to the manufacture, production, growth, extraction, installation, development, improvement, and creation of qualifying production property.54 Section 199(c)(4)(A) required the qualified activities be undertaken “in whole or in significant part within” the United States. Domestic corporations determined domestic production gross receipts deducted, the cost of goods sold, and other deductions allocable to those receipts to arrive at its qualified production activities income (QPAI).55

The satisfaction of the above tests for each regime contained easy to meet, if any, documentation requirements. Copies of the export bill or certificates of lading indicating the country of delivery satisfied the tests for the DISC, FSC, and ETI regimes.56

C. Pricing Methods

Excluding section 199, the legacy regimes offered multiple pricing methods for domestic corporations to maximize their tax benefits. Each domestic corporation, depending on the nature of its business, could choose the best transfer or administrative pricing method for each transaction, allowing it to reach the full potential of its tax benefit.

Administrative pricing methods used in connection with export incentive regimes started during the era of the DISC regime. Congress recognized that section 482 required the reallocation of essentially all of a DISC’s export profits to the parent corporation, defeating the intent of the DISC regime.57 In response, Congress created administrative pricing rules under section 994 to safeguard DISCs from section 482.58

Section 994(a) fixed transfer prices on the sale of export property, enabling the DISC to obtain a specified share of the combined profit on the manufacture and sale of the goods, regardless of the sales price actually charged. The DISC derived taxable income attributable to a sale in an amount that did not exceed the greatest of: (1) 4 percent of qualified export sale receipts, plus 10 percent of its export promotion expenses; (2) 50 percent of the combined taxable income, plus 10 percent of the export promotion expenses; or (3) the DISC’s taxable income based on the actual sales price, subject to adjustments under section 482.59 The DISC regime disallowed the use of the gross receipts or combined taxable income methods for the creation or increase of a loss for the related supplier.60 The DISC regime allowed for the application of marginal costing when the domestic corporation sought to establish a foreign market for a product.61 Also, DISC allowed domestic corporations to exclude loss transactions.62

Similarly, the FSC regime offered transfer and administrative pricing rules.63 Generally, a domestic corporation selected one of the three intercompany pricing methods-gross receipts, combined taxable income, or arm’s-length pricing under section 482 — whichever generated the most FSC profit, to derive FSC taxable income.64

The administrative pricing methods, gross receipts, and combined taxable income applied to the sale of export property and income from a lease, service, or commission transaction. Under the gross receipts method, the FSC derived profits not to exceed 1.83 percent, and under the combined method, not to exceed 23 percent of the combined taxable income attributable to FTGR.

Section 927(d)(2)(B) allowed FSC provisions to apply on a transaction-by-transaction (T-by-T) basis, and may be applied on a grouping basis when using the administrative pricing methods. Also, marginal costing applied when an FSC sought to maintain a foreign market for the product.65 The FSC provisions also afforded domestic corporations the opportunity to exclude loss transactions.66

The ETI regime prescribed qualifying foreign trade income excluded from taxable income from transactions equal to 30 percent of the foreign sale and leasing income, 1.2 percent of the FTGR, and 15 percent of the FTI.67

The ETI regime followed several FSC principles for the determination and computation of and qualification for the tax benefit.68 These principles allowed domestic corporations to use T-by-T analyses or group transactions based on product lines.69 Also, as with FSC, domestic corporations excluded loss transactions from the ETI computation.70

Section 199 differed from the preceding regimes in that it did not offer various pricing methods. It provided for a deduction equal to 9 percent of the lesser of the QPAI or taxable income for the year.71 This regime also differed in allowing domestic corporations to determine gross receipts on only an item-by-item basis, not on a division-by-division, product-line-by-product-line, or T-by-T basis.72 The section 199 regulations also did not offer the transaction loss exclusion.

D. Summary of the Four Regimes

The structure of both the DISC and FSC regimes created favorable tax options for domestic corporations and incentives for exportation. The ETI regime possessed more requirements than FSC for domestic corporations to meet; however, it afforded the corporations most of the same multiple opportunities for maximizing their tax benefits.

Section 199 offered fewer maximizing opportunities because it didn’t offer various pricing methods, required item-by-item analyses, and disallowed loss transactions; however, it did not have a documentation requirement. The TCJA repealed section 199, making it the last investment incentive regime before the enactment of section 250(a)(1)(A).

Congress drafted the FDII deduction as the carrot to the stick of the GILTI tax in the new U.S. tax system. The four previous regimes offered lawmakers a strong foundation and examples of the most beneficial provisions for domestic corporations before the enactment of the FDII deduction. Some benefits of these past regimes disappeared, weakening the position that the FDII deduction is indeed the carrot; however, it could operate as such if we follow the techniques domestic corporations used to implement the past sections.

IV. Optimization of the FDII Deduction

Review of the previous regimes highlights the flaws of considering the FDII deduction the carrot of tax reform. Despite the onerous substantiation requirements, the exclusion of favorable benefit enhancements offered by the previous regimes prevent the FDII deduction from granting domestic corporations the most ideal legislative grace (for example, exclusion of loss transactions and various pricing methods). While these preceding enhancements are absent, practical applications cultivated from prior experience offer solutions for optimizing the FDII deduction.

The computation of FDII requires the accurate and labor-intensive calculation of multiple variables; however, it presents domestic corporations with opportunities. A T-by-T analysis allows domestic corporations to more accurately qualify all eligible sales and services as FDDEI; determine cost of sales; attribute tax adjustments to sales and cost of sales; and attribute deductions to FDDEI, non-FDDEI, and other classes of gross income. Moreover, this analysis facilitates the gathering of the necessary documentation for FDDEI substantiation requirements. The benefits offered by the T-by-T analysis may be expanded through an asset-by-asset study to minimize a domestic corporation’s QBAI.

A. Transaction-by-Transaction

Optimization of FDII stems from conducting a T-by-T analysis. Interestingly, the preamble to the proposed section 250 regulations states that “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).”73 Following the dissuasion presented in the preamble results in missed opportunities for FDII optimization.

In general, a T-by-T analysis examines each transaction of every member of the U.S. consolidated group to identify all FDDEI transactions and increase their profitability. The examination identifies the relevant attributes of each transaction, including whether it is a sales or service; gross receipts amount; product or product line; customer; and destination of each sale or location of each service. After such examination, the aggregate amount of all transactions, more often than not, does not agree with pretax book income. This disparity also results in opportunity. Rather than use a pro rata apportionment, a domestic corporation can allocate or apportion sales and cost of sales book adjustments by transaction, product, or even customer to reconcile to pretax book income.

The following example illustrates the application of a T-by-T analysis and the possible benefit in connection with a cost of goods sold tax adjustment.

Example 1

Scenario 1 (no T-by-T)

 

Total

FDDEI

Non-FDDEI

Sales

$2,000

$800

$1,200

CGS

$1,320

$480

$840

CGS M-3

$200

$73

$127

GM

$480

$247

$233

Scenario 2 (no T-by-T)

 

Total

Product A — FDDEI

Product B — Non-FDDEI

Sales

$2,000

$800

$1,200

CGS

$1,320

$480

$840

CGS M-3

$200

 

$200

GM

$480

$320

$160

The preceding table shows that the domestic corporation has both FDDEI and non-FDDEI transactions in the tax year and a tax adjustment increasing cost of sales of $200. A T-by-T analysis discovered the FDDEI transactions are attributable to Product A, the non-FDDEI transactions are attributable to Product B, and the cost of sales tax adjustment was incurred because some sales are attributable to Product B.

Under Scenario 1, FDDEI derived without a T-by-T analysis, there is no information pertaining to the products that derive FDDEI; hence, the $200 increase to cost of sales is apportioned pro rata to both FDDEI and non-FDDEI based on cost of sales. Under Scenario 2, the T-by-T analysis uncovered the tax adjustment is attributable only to Product B; therefore, the cost of sales tax adjustment is allocated only to Product B, non-FDDEI. Thus, under Scenario 2, the T-by-T analysis increases the FDDEI gross margin by $73 ($320-$247). Importantly, the example demonstrates a T-by-T analysis may optimize FDDEI when used for determining cost of sales, allocating and apportioning sales and cost of sales tax adjustments, and reconciling T-by-T sales and cost of sales data to pretax book income.

Regarding deductions, a T-by-T analysis may assist a corporation in choosing the most reasonable method of allocation and principles of apportionment for deductions among FDDEI, non-FDDEI, and residual grouping (for example, subpart F and GILTI baskets). A T-by-T analysis allows domestic corporations to determine, based on facts and circumstances, which method of allocation and apportionment attributes the least amount of deductions to FDDEI.

A T-by-T analysis even assists domestic corporations in meeting the onerous documentation requirements of the FDII deduction. The analysis provides insight into the documentation needed for each FDDEI sales and services transaction, and any necessary modification of current practices and contracts needed to meet the substantiation requirements more easily in future years.

B. Asset-by-Asset Analysis for QBAI

A T-by-T analysis is more detailed than the proposed section 250 regulations recommend; however, for a proper FDII deduction calculation, even this may not suffice. The FDII deduction creates a fiction that the domestic corporation earns a 10 percent return on depreciable tangible property used to produce DEI; in other words, a 10 percent return on specified tangible property. Proper quantification of specified tangible property is necessary to compute QBAI, and an asset-by-asset analysis may optimize (decrease) QBAI. Importantly, a smaller QBAI amount produces a larger DII amount, the multiplicand in the FDII equation; hence, generating a larger FDII deduction.

QBAI requires the inclusion of assets used to produce DEI; however, manufacturing assets may be responsible for the production of FDDEI, non-FDDEI, and foreign branch income.74 Foreign branch income is excluded from DEI.75 Thus, an asset-by-asset analysis may allow a domestic corporation to exclude some amounts from QBAI based on relative gross income attributable to foreign branch income.

Also, a domestic corporation may have property that produces all gross income, including DEI, such as property used for general and administrative functions. In those instances an asset-by-asset analysis may determine the proportion of the property attributable to non-DEI (for example, GILTI, subpart F, and branch income), allowing the domestic corporation to exclude additional amounts from QBAI.

The asset-by-asset analysis allows domestic corporations to determine each piece of specified tangible property and each piece of dual-use property. This analysis allows domestic corporations to effectively quantify the specified tangible property and the calculation of the dual-use property ratio, which allows for not only the correct determination of QBAI but also the optimization of QBAI.

V. Conclusion

The FDII deduction is not as taxpayer-favorable as the previous exporting and manufacturing incentive regimes. Prior statutes allowed the exclusion of loss transactions, various pricing methods, product grouping, and in some cases the further manufacturing of goods. Those benefits are not in the FDII regime.

Even with the opportunity-generating mechanisms absent, the knowledge of benefits derived from T-by-T analyses may grant domestic corporations a larger FDII benefit. The proposed section 250 regulations dissuade a T-by-T analysis, let alone mandate it. However, T-by-T analysis offers domestic corporations a way to increase their FDII benefits: Domestic corporations may increase FDDEI when using it to qualify FDDEI for determining cost of sales; allocating and apportioning sales and cost of sales tax adjustments; and reconciling T-by-T sales and cost of sales data to pretax book income. Also, it may allow domestic corporations to choose the most reasonable principles of allocation and methods of apportionment for deductions, and assist them in meeting the onerous documentation requirements. An asset-by-asset analysis may allow for the optimization of QBAI by properly identifying the proportion of all pieces of property treated as specified tangible property attributable to non-DEI.

The regimes the FDII deduction replaces offer guidance on how to ensure meeting the new requirements and receiving the deduction’s full benefit. Although the FDII deduction may not be as much of a carrot as domestic corporations hoped, optimization techniques can grant them a larger benefit than originally anticipated.

FOOTNOTES

2 “The Committee believes that offering 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.” See Senate Budget Committee explanation of the bill as passed by the Senate Finance Committee, at 370 (Dec. 7, 2017).

3 Revenue Act of 1971. The first true major tax incentive to foreign commerce was the western hemisphere trade corporation. See Terence M. Flynn, “Western Hemisphere Trade Corporations: Quo Vadis?” 12 Tax L. Rev. 413 (1957).

4 Section 250(a)(1)(A). The deduction will decrease from 37.5 percent to 21.875 percent after 2025. Section 250(a)(3)(A).

7 Prop. reg. section 1.250-1(c)(13).

8 Prop. reg. section 1.250(b)-1(c)(14). Gross income for purposes of gross DEI is determined by subtracting cost of goods sold from gross receipts under any reasonable method. Prop. reg. section 1.250(b)-1(d)(1).

19 Prop. reg. section 1.250(b)-2(c)(1). A corporation’s QBAI also increases by its share of the partnership’s adjusted basis in the partnership’s specified tangible property. Prop. reg. section 1.250(b)-2(g).

20 Prop. reg. section 1.250(b)-2(c)(2). This does not include specified tangible property when transferred to a related party when the property remains in use in the production of gross DEI. Prop. reg. section 1.250(b)-2(h)(1). This rule also applies for a transfer to or a lease with an unrelated party in accordance with a structured arrangement. A structured arrangement exists only if a reduction in the domestic corporation’s DTIR is a material factor or in the pricing of the arrangement or a principal purpose of the arrangement. Prop. reg. section 1.250(b)-2(h)(2).

21 Section 250(a)(2) provides the limitation based on taxable income is: “(A) In general if, for any taxable year — (i) the sum of the FDII and GILTI amount otherwise taken into account by the domestic corporation under paragraph (1), exceeds (ii) the taxable income of the domestic corporation (determined without regard to this section), then the amount of the foreign-derived intangible income and the global intangible low-taxed income amount so taken into account shall be reduced as provided in subparagraph (B).”

23 Reg. section 1.861-8(f)(2)(i) (“the taxpayer is required to use the same method of allocation and the same principles of apportionment for all operative sections”).

27 Id.

28 See section 163(j)(8)(A)(iii); prop. reg. sections 1.163(j)-1(b)(1)(i)(B), 1.163(j)-1(b)(37)(ii), 1.250(b)-1(d)(2)(ii).

33 Joint Committee on Taxation, “General Explanation of the Revenue Act of 1971 92nd Cong.,” JCS-30-72 (Dec. 15, 1972).

34 See U.S. Mission to the European Union, “Report of the WTO Panel on DISC Legislation: Report of the Panel Presented to the Council of Representatives on 12 November 1976,” Doc. L/4422-23S/98, para. 12.

35 Id.

36 Reed D. Rubenstein, “A New Export Policy: The Foreign Sales Corporation and State Unitary Taxation of Foreign Source Income,” 6 Mich. J. Int’l L. 61, 69 (1984).

37 Section 922(a) before repeal by P.L. 106-519. An example is the inclusion of the requirement of a subsidiary to incorporate under a qualified foreign country or one of four countries: American Samoa, North Mariana Islands, Guam, or the U.S. Virgin Islands. Reg. section 1.922-1(a), Q&A 1; reg. section 1.922-1(e), Q&A 5.

38 Section 923(b) before repeal by P.L. 106-519.

40 Sections 114 and 941 through 943 before repeal by P.L. 108-357.

41 Section 941(a)(1) before repeal by P.L. 108-357.

42 Section 114(a) before repeal by P.L. 108-357.

43 Section 199(a) before repeal by P.L. 115-97.

44 In no event is the destination test satisfied for property that is subject to any use (other than a resale or sublease), manufacture, assembly, or other processing (other than packaging) by any person between the time of the sale or lease by such seller or lessor and the delivery or ultimate delivery outside the United States. Reg. section 1.993-3(d)(2)(iii).

46 Section 924 before repeal by P.L. 106-519.

48 Section 927(a)(1)(C) before repeal by P.L. 106-519.

49 Reg. section 1.927(a)-1T(d)(4)(iii) (A buyer ultimately uses property (including components) in the United States if, within three years following purchase of the property, either (1) the buyer resells the property (or a second product that includes the property as a component) to another buyer that uses the property (or second product) within the United States, or (2) the buyer (or a subsequent buyer) does not use the property (or a second product that includes the property as a component) predominantly outside the United States during any period of 365 consecutive days.).

50 Section 114(e) before repeal by P.L. 108-357. Gross receipts are constituted as FTGR when derived from one of the following: (1) sale, exchange, or other disposition of qualifying foreign trade property; (2) from the lease or rental of qualifying foreign trade property for use by the lessee outside the United States; (3) for services that are related and subsidiary to the sale, exchange, disposition, lease, or rental of qualifying foreign trade property; (4) for engineering or architectural services for construction projects located outside the United States; or (5) for the performance of some managerial services for unrelated persons.

51 S. Rep. No. 106-416, at 18-19 (2000); H.R. Rep. No. 106-845, at 32-33 (2000) (stating principles of FSC reg. section 1.927(a)-1T(D)(4)(ii) apply).

52 Reg. section 1.927(a)-1(T)(d)(4)(ii).

53 The five specified categories of activities are: (1) advertising and sales promotion; (2) processing of customer orders and arranging for delivery; (3) transportation outside the United States in connection with delivery to the customer; (4) determination and transmittal of a final invoice or statement of account or the receipt of payment; and (5) assumption of credit risk. Section 942(b)(3).

55 Section 199(c)(1) before repeal by P.L. 115-97.

56 See reg. section 1.993-3(d)(ii) for documentation requirements for DISC. Also, a DISC that sold property to a broker/consolidator for resale overseas satisfied the destination test when it received a statement from the broker/consolidator stating it shipped the goods overseas. Rev. Rul. 77-249, 1977-2 C.B. 265; see reg. section 1.927(a)-1(T)(d)(3)(i) for proof of compliance requirements to satisfy the destination test for the FSC and ETI regimes.

58 S. Rep. No. 92-437, at 559, 618.

59 Section 994(a); see Computervision Corp. v. Commissioner, 96 T.C. 652, 669 (1991) (requiring the inclusion of 10 percent of export promotion expenses under the 4 percent or combined taxable income method).

60 Reg. section 1.994-1(e)(1); see Archer-Daniels-Midland Co. v. United States, 37 F.3d 321 (7th Cir. 1994), cert. denied, 514 U.S. 1077 (1995).

63 Section 925 before repeal by P.L. 106-519.

64 Section 925(a); reg. section 1.925(a)-1T(e)(4).

65 Reg. section 1.925(a)-1T(c)(3), -1T(c)(6), 1.925(b)-1T.

66 Reg. section 1.927(b)-1T(e)(2).

67 Both the IRS and taxpayers may rely on the FSC regulations and other administrative guidance to apply analogous ETI rules and principles. See JCT, “General Explanation of Tax Legislation Enacted in the 106th Congress,” JCS-2-01 (Apr. 19, 2001).

68 The principles from repealed sections 921-927 applied to ETI. JCT, “Technical Explanation of the FSC Repeal and Extraterritorial Income Exclusion Act of 2000,” JCX-111-00 (Nov. 1, 2000).

69 Section 943(b)(1)(B) before repeal by P.L. 108-357.

70 Reg. section 1.927(b)-1T(e)(2).

71 Section 199(a) before repeal by P.L. 115-97.

73 Preamble to prop. reg. section 1.250(b), at III. Determination of FDII, B. General Rules for FDDEI Transactions, 6. Special Rules for Certain Loss Transactions.

74 Dual-use property is tangible property used in both the production of gross DEI and the production of gross income that is not gross DEI. Reg. section 1.250(b)-2(d). This dual-use property must be allocated with the dual-use ratio, the ratio of the gross DEI produced by the property to the total amount of gross income produced by the property for the tax year. Prop. reg. section 1.250(b)-2(d)(1), (2).

75 Prop. reg. section 1.250(b)-1(c)(14)(vi)

END FOOTNOTES

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