u.s. tax reform – domestic corporate update · 2020-06-20 · eversheds sutherland • gilti...

© 2018 Eversheds Sutherland (US) LLPAll Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Eversheds Sutherland (US) LLP and the recipient. Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com.

FDII Sense

U.S. Tax Reform – Domestic Corporate Update

June 26, 2018Randy BuchananRobb ChaseEllen McElroyAaron PaynePartners, Eversheds Sutherland (US) LLP

115-97The Law Formerly Known as the

Tax Cuts and Jobs Act

Eversheds Sutherland

Overview of FDII

Technical Considerations

Planning Considerations

Agenda

2


Overview of FDII


• What is FDII?• New section 250(a)(1)(A) provides a deduction for “foreign derived

intangible income” (“FDII”) • Reduced tax rate achieved through a 37.5% deduction for FDII for tax years

beginning 2018 through 2025 (for taxable years beginning after 2025, the FDII deduction is reduced to 21.875%)

• Results in an effective tax rate on FDII of 13.125% (increased effective tax rate of ~16.4% for taxable years beginning after 2025)

• Deduction is limited to there being positive taxable income

• Applies on consolidated group level?

FDII

4


• (Not so) Basic Math:

FDII

5

FDII

Foreign-Derived Deduction

Eligible IncomeDeemed

Intangible Income

Deduction Eligible Income

= x


• Or, applying the commutative property:

FDII

6

FDIIForeign-Derived


Deemed Intangible Income


= x


Dissecting the Calculation



8

• Also excludes certain domestic income:

• Domestic oil and gas extraction income

• Financial services income

• Excludes certain foreign income: • Subpart F income • GILTI• Dividends received from CFCs• Foreign branch income

FDIIForeign-Derived




= x


• More Math:


9

FDIIForeign-Derived




= x


= Deduction Eligible Income - Deemed

Tangible Income Return


• Deemed Tangible Income Return• 10% of the corporation’s qualified business asset investment (“QBAI”)

• QBAI: Quarterly average aggregate adjusted bases in the depreciable tangible property used in the production of deduction eligible income

• The average aggregate adjusted bases are determined using the alternative depreciation system

Deemed Tangible Income Return

10

Deemed Intangible Income = Deduction

Eligible Income - Deemed Tangible

Income Return


• Income derived in connection with property sold by the taxpayer to a foreign person for foreign use, and

• Income derived in connection with services provided by the taxpayer to any person, or with respect to property, not located in the U.S.

• Only deduction eligible income included

Foreign Derived Deduction Eligible Income

11

FDIIForeign-Derived




= x


• “Sale” defined broadly • Includes income from a lease, license, or exchange

• Foreign Use• “Foreign use” means any use, consumption, or disposition which is

not within the United States• Sales of property to a non-US person must be for foreign use • Services must be provided to any person, or with respect to

property, not within the United States• Foreign use must be shown to the “satisfaction of the Secretary”

Foreign Derived Deduction Eligible Income – Sales and Services

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• What is a Foreign Use?

Foreign Derived Deduction Eligible Income – Sales

13

Unrelated Foreign Corp.

Raw Materials Sale

ForeignCustomers

Finished GoodsSaleU.S.

GOOD

U.S. ForeignCustomers

Finished GoodsSale


• What is a Foreign Use?• Sales to a non-related person (whether U.S. or foreign) are not for

foreign use if subject to further manufacture or modification within the U.S. prior to foreign use


14

NOT GOOD

Unrelated U.S. Corp.

Raw Materials Sale

ForeignCustomers

Finished GoodsSale

Processing/Manufacturing

U.S.

GOOD


• What is a Foreign Use?• Sales to a non-related person (whether U.S. or foreign) are not for

foreign use if subject to further manufacture or modification within the U.S. prior to foreign use


15

ALSO NOT GOOD


Raw Materials Sale

U.S. Branch

ForeignCustomers

Finished GoodsSale

Processing/Manufacturing

U.S.


• Persons or Property not “located” in the United States• Services is focused not on use, but instead whether the services are

performed for persons, or with respect to property, not located in the U.S.

Foreign Derived Deduction Eligible Income –Services

16

Services ForeignCustomerU.S.

GOOD


• Persons or Property not “located” in the United States• Services is focused not on use, but instead whether the services are

performed for persons, or with respect to property, not located in the U.S.


17

Services Customer LocatedIn USU.S.

NOT GOOD


• Persons or Property not “located” in the United States• Not clear if the foreign branch of a U.S. person is considered to be

“located” in the United States for purposes of determining if services qualify as foreign derived deduction eligible income


18

MAYBE

U.S.

ForeignBranch

U.S. Person U.S.

U.S.Branch


Foreign Customer

Services


• Sales of Property to Related Foreign Parties• Property must be for foreign use (to the satisfaction of the Secretary)

and either:

• Ultimately sold by a related party to an unrelated foreign person

Foreign Derived Deduction Eligible Income – Sales to Related Parties

19

License/Sale ofProperty

License/Sale ofPropertyU.S. Parent Related

Foreign Corp.Unrelated

Foreign Corp.

- OR -


• Sales of Property to Related Foreign Parties

• Used by a related party in connection with property that is sold to an unrelated foreign person, or

• Used by a related party in connection with services that are performed for an unrelated foreign person

Foreign Derived Deduction Eligible Income – Sales to Related Parties

20

License/Sale ofPropertyComponent

Sale of PropertyU.S. Parent Related

Foreign Corp.Unrelated

Foreign Corp.

ServicesLicense/Sale ofProperty

U.S. Parent Related Foreign Corp.



• Services Provided to Related Foreign Parties• Services provided to a related party are not for foreign use unless

the taxpayer establishes to the satisfaction of the Secretary that such service is not substantially similar to services provided by the related party to persons located within the United States

Foreign Derived Deduction Eligible Income – Services to Related Parties

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Interaction with GILTI


• Section 250 also provides a deduction for GILTI income that is taxable under new section 951A• Companion provisions that tax the deemed intangible income earned by U.S.

corporations and controlled foreign corporation (“CFCs”) owned by U.S. corporations at a reduced comparable tax rate

• Both use a proxy for intangible income based on an assumed 10% return on tangible depreciable asset basis

• In general, the provisions are intended to achieve neutrality as to where U.S. corporations earn intangible income

• Section 250 provides FDII deduction and a 50% deduction for GILTI • In shifting income between the U.S. and CFCs, as GILTI

decreases, FDII increases, and vice versa

The Other Side of Section 250

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• GILTI provisions impose a current minimum tax on certain income of a CFC• Generally equals a CFC’s net non-subpart F, non-ECI income less the

CFC’s net deemed tangible income return • Corporate US shareholders are permitted a 50% deduction with respect to

GILTI • Taxable income limited together with FDII

• Corporate US shareholders are permitted a credit for 80% of the foreign taxes paid with respect to GILTI• Separate FTC basket for GILTI foreign taxes• Section 78 gross-up determined without regard to the 80% limitation;

but allowed 50% deduction• Global effective tax rate ranges from 10.5% to 13.125% (until 2026),

subject to increase due to allocation of expenses to GILTI basket for FTC purposes

GILTI Overview

24


FDII GILTI

Affected Taxpayers US Corporations U.S. Shareholders of CFCs

Targeted Income Foreign Deemed Intangible Income Foreign Deemed Intangible Income

Threshold for Deduction

Deduction Eligible Income Exceeding 10% of QBAI

Net Tested Income Exceeding 10% of QBAI

Effective Tax Rate+ 13.125% 10.5% - 13.125%*

Side by Side Comparison

25

* Assumes full FTC with no expense allocation—an issue for another presentation+ Assumes taxable income limitations on deduction do not apply.


Planning Considerations


Example 1:Increased Royalty Rates to U.S.

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Considerations:

• Converts GILTI to FDII

• Increases local deduction in CFC

• Depending on local tax rate in CFC and GILTI FTC position, may produce net global benefit

Before After

5%Royalty

U.S. Shareholder

CFC

Foreign IP

10%Royalty

U.S. Shareholder

CFC

Foreign IP


Shift from GILTI to FDII Example

28

Before AfterRoyalties to US 100 200Shifted CFC Net Income 100 0

GILTI Inclusion on Shifted Income 100 050% Deduction -50 0Net GILTI Inclusion 50 0Tax on GILTI Before FTCs 10.5 0FTCs -10.5 0Net Tax on GILTI 0 0

Royalties Included as FDII 100 20037.5% Deduction -37.5 -75Net Taxable Income 62.5 125Tax on Royalty Income 13.125 26.25

Benefit from Local 15% Deduction for Royalties -15 -30Net Global Tax -1.875 -3.75

Assumes no TI limitation, excess GILTI basket FTCs, no impact on 861 allocation, no impact on net deemed tangible income return, no US-derived deduction eligible income, royalties are not GILTI basket, GILTI Gross-up is GILTI basket


Example 2:Sale of IP to U.S. and License-Back

29

Before

Sale of IP

Consideration

Steps:• Sale of IP to U.S. Shareholder

• License of IP to CFC • Sales to foreign customers by CFCForeign

3rd Party Customer

Sales

Consideration

U.S. Shareholder

CFCForeign IP


Example 2:Sale of IP to U.S. and License-Back

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Considerations:• Converts GILTI to FDII• Amortization/Anti-churning

considerations • Reduces local taxable income in CFC• Local tax consequences of sale• Difficult to unwind• BEAT implications

After

License

Foreign 3rd Party

Customer

Sales

Royalty

Consideration

U.S. Shareholder

CFC

Foreign IP


Example 3A: Check-the-Box

31

Steps:• Check the box election for

CFC1

Before

Foreign 3rd Party

Customer

SalesLicense

Consideration

U.S. Shareholder

CFC1Foreign IP

CFC2


Example 3A: Check-the-Box

32

After

Foreign 3rd Party

Customer

Sales

Considerations:• Converts GILTI to foreign branch income

Consideration

U.S. Shareholder

CFC1 CFC2Foreign IP

License


Example 3B: Sublicense

33

Steps:• License from CFC1 to U.S.

Shareholder • Sublicense from U.S.

Shareholder to CFC2

After

Foreign 3rd Party

Customer

Sales

License Sublicense

Consideration

U.S. Shareholder

CFC1 CFC2Foreign IP


Example 3B: Sublicense

34

Considerations:• License from CFC1 to US Shareholder

disregarded• Foreign branch income?• License to CFC2 is FDII• Converts GILTI to FDII

After

Foreign 3rd Party

Customer

Sales

License Sublicense

Consideration

U.S. Shareholder

CFC1 CFC2Foreign IP


Questions?

35

eversheds-sutherland.com© 2018 Eversheds Sutherland (US) LLPAll rights reserved.This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.

Randy [email protected](202) 383-0227

Robb [email protected](202) 383-0194

Aaron [email protected](202) 383-0831

Ellen [email protected](202) 383-0948

u.s. tax reform – domestic corporate update · 2020-06-20 · eversheds sutherland • gilti...

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