The Treasury Department published final regulations under Section 250 on July 15, 2020. Section 250 generally provides domestic corporations a deduction related to its foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI).
The final regulations are effective on September 14, 2020 and are generally applicable to tax years beginning on or after January 1, 2021 (with certain exceptions). However, the final regulations may be applied by taxpayers to taxable years beginning on or after January 1, 2018, provided the regulations are applied in their entirety (with certain exceptions).
The final regulations retain the basic approach and structure of the proposed regulations with certain modifications and clarifications. A few highlights include:
- Taxpayer favorable reduction to certain documentation requirements, including no specific substantiation requirement for establishing:
- Foreign person status;
- Foreign use related to sales of certain general property that are made directly to end users; and
- The location of general services provided to consumers.
- Note: the general substantiation requirements still apply.
Guidance Related to Foreign Use and Location of Foreign Service Recipients
- Modifications to foreign use standard for general property, including:
- Changes to manufacturing exception, including providing that general property is subject to a physical and material change if it is substantially transformed and is distinguishable from its original state. In addition, the final regulations provide a separate rule for the component test and retain the 20 percent safe harbor.
- The final regulations provide that electronic transfers of digital content (i.e., computer program or other content in digital format) are treated as general property for purposes of applying the regulations. In addition, general property primarily containing digital content that is transferred electronically is for foreign use based on the location where an end user downloads, installs, receives, or accesses the digital content. Where information is unavailable and gross receipts from all sales related to the end user are in the aggregate less than $50,000, the sale will be foreign.
- Modifications to foreign use standard for intangible property, including specific guidance related to who and where the end users are which in general is dependent upon whether the intangible property is embedded in or used in connection with the sales of general property, is used in providing a service, is used in research and development, or consists of a manufacturing method or process.
- Guidance related to the location of the recipient of general services. Generally retains the guidance in the proposed regulations but makes certain modifications, including:
- Provides for new subcategories for electronically supplied services and advertising services.
- Elimination of rule in proposed regulations that provided for an allocation method where the taxpayer did not have reliable information regarding the specific location of a business recipient.
- For business recipients of general services that do not have an office or fixed place of business (such as a partnership that does not itself have any offices or employees but is managed by one or more of its partners), the recipient is deemed to be located at its primary billing address.
- Eliminates the ordering rules for sections 250, 163(j), 172, and other Code provisions that were provided in the proposed regulations. Until further guidance is provided, taxpayers may use any reasonable method so long as the taxpayer consistently applies the method for all tax years beginning on or after January 1, 2021.
- Guidance related to the allocation of expenses in determining Deduction Eligible Income (DEI) and Foreign Derived Deduction Eligible Income (FDDEI), including providing that certain limitations and carryovers (such as sections 163(j), 170(b)(2), 172, 246(b), and 250) are not taken into account.
- Removed the rule in the proposed regulations that the exclusive apportionment rule does not apply in apportioning R&E expenses to DEI and FDDEI.
Related Party Rules
- Modifications to the related party rules, including:
- Modifies the resale rule to generally allow a taxpayer to treat a sale to a related party as an FDDEI transaction in the tax year of the related party sale provided that an unrelated party transaction has or will occur in the ordinary course of business with respect to the property sold to the related party. The final regulations provide further guidance with respect to how this determination is made.
- Provides that an intermediate sale to a US related party will not disqualify the sale as an FDDEI sale.
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