Podcast: The Export Incentive Under FDII

On this episode of Weaver: Beyond the Numbers, Vince Houk and Josh Finfrock dive into the export incentive under FDII and what that can mean for your organization.

Key Points:

• One overlooked opportunity that can help maximize FDII is to analyze the general and administrative expense allocation, commonly allocated pro-rata, and to allocate in accordance with arm’s length principles based on the underlying activities and the genuine beneficiary.
• Other opportunities include looking at services provided by U.S. companies that may qualify for the FDII benefit and reviewing the IP structure related to potentially moving IP into the U.S.
• The U.S. provides a jurisdiction with substance, a good treaty network and potentially lower tax rates compared to other countries, making it an attractive option for IP ownership and maintaining key operations.

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©2023

00:00:00

Vince: Welcome to another edition of Weaver: Beyond the Numbers. I’m Vince Houk, partner-in-charge of international tax. Today we will be discussing tax opportunities for businesses with cross-border transactions. We’re going to dive into the export incentive under FDII and how to use transfer pricing to maximize that benefit.

To discuss this topic, I have a very special guest with me today, Mr. Josh Finfrock. Josh, welcome to the show.

00:00:32

Josh: Thanks for having me.

Before we get started on the transfer pricing aspects, maybe you could level set a little bit on FDII regime.

00:00:39

Vince: Yeah, absolutely. So FDII, first of all, it stands for foreign-derived intangible income and it’s just an export incentive that came out of tax reform and it’s an incentive specifically for C-corporations. The great thing about it is that C-corporations are normally going to be taxed at the 21% rate, but what this allows is for qualified export income to actually get to a rate as low as 13.125%, which is a pretty substantial spread for companies. But again, it does apply just to C-corporations.

This is an area that we spend a lot of time on in the planning side just because we’re really always looking at ways to optimize that benefit.

From a transfer pricing perspective, what would you say is the probably most overlooked opportunity when it comes to FDII?

00:01:35

Josh: One opportunity that we like to look for that can be an easy find for a lot of people is to take a look through the expense allocation with the G&A expenses. Because in calculating that FDII benefit and deduction, G&A allocation is happening between the non-FDII segment and the FDII segment. So we can take a more granular look and use the transfer pricing principles at play in the service regulations, to think about where those really truly drive genuine benefit and allocate accordingly. And what we find is oftentimes companies, for example, might have foreign operations as well that may help with some of the marketing activities or incur costs that we’re kind of double charging the US segment for. So if we can find opportunities like that with a more granular, fact based analysis, then we can derive a better benefit.

00:02:24

Vince: That’s an excellent one because I think we’ll get a lot of new clients that come in the door and a lot of times we’re seeing they’re just applying some pro-rata share based off of gross income and they haven’t really put a lot of thought into that. And that’s where I agree with you, I think that is probably the most overlooked opportunity and probably the easiest one to really implement. There’s not a huge cost involved in doing something like that, it’s not like we’re changing the supply chain or anything like that. We’re literally looking into their existing costs and trying to figure out what is the best allocation to that export income and that helps us maximize that benefit. So absolutely, that’s a great one.

What are some other opportunities out there that companies might look at outside of expense allocation?

00:03:09

Josh: In a general sense, we can look for opportunities where services from the U.S. company may qualify for that benefit on certain services that would be done by the U.S. company outbound.

The other really obvious one would be to review the IP structure. So a lot of companies have bought acquired IP offshore or they’ve moved IP offshore. Is there a place to look at moving that, locating that into the US?

00:03:36

Vince: And when companies are looking at where to base some of their operations out of or hold their IP, I think this is an absolutely critical thing that should be factored in because I think when you look globally, we used to migrate IP offshore all the time and the thought was, companies are owning the IP overseas and usually there was a lower tax rate involved. But now getting down to 13.125%, it’s kind of hard when you look across the country and across the globe to find a rate that low and companies naturally where they have a lot of their key people out as well.

00:04:13

Josh: Yeah, exactly. Certainly the U.S. provides a jurisdiction that has plenty of substance, a good treaty network, some of these things that are helpful. But if you think about five to 10 years ago, everybody was lining up to move to Ireland for this 12.5% rate. Well, now they can get that same kind of rate here, potentially with more substance and basis for maintaining that IP here in the US.

00:04:35

Vince: Yeah, absolutely. I think that’s an absolutely critical one. Thinking about IP ownership and where that IP ownership should be for especially for global organizations.

Thanks so much for being here. Josh, this was great insight. Appreciate it as always.

That’s our show. Stay tuned for another episode of Weaver: Beyond the Numbers, we will continue to discuss solutions and opportunities for your cross-border activities.