Foreign-derived intangible income – tax reform impact

Your Guide to State, Local, Federal, Estate + International Taxation

foreign-derived intangible incomeOne good provision out of the new tax reform bill or Tax Cuts and Job Act (TCJA pronounced Tic-Ja) is the foreign derived intangible income or FDII. This provides domestic corporations with reduced rates of U.S. tax on their FDII. FDII is the domestic corporation’s portion of its intangible income, determined on a formulaic basis (shown below), that is derived from serving foreign markets.

To try to sum this up better, domestic corporations now receive a deduction for their foreign-derived intangible income which is an amount equal to the sum of:

  • 37.5% of the foreign-derived intangible income of such domestic corporation for such taxable year, plus
  • 50% of
    • The global intangible low-taxed income (GILTI) (if any) which is included in the gross income of such domestic corporation under Sec. 951A for such taxable year, and
    • The amount treated as a dividend received by such corporation under Sec. 78 which is attributable to the amount described in the previous bullet.

Once you get the help of your tax advisor and they work through the deduction, then your outcome for FDII should produce an effective tax rate (based on a 21% corporate tax rate) for such taxable years as follows:

  • Taxable years beginning after 12-31-2017 and before 01-01-2026 is 13.125%
  • Taxable years beginning after 12-31-2025 is 16.406%

*Note that the deduction for FDII is available only to C Corporations that are not RICs or REITs, and S Corporations’ taxable income is computed in the same manner as an individual.

Specific formulas for your convenience and to demonstrate the complexity of the calculations are shown below.

FDII = Deemed Intangible Income x (Foreign-Derived Deduction Eligible Income ÷ Deduction Eligible Income)

Deduction Eligible Income = Gross Income – Exceptions – Allocable Deductions

Deemed Intangible income = Deduction Eligible income – (10% X Qualified Business Asset Investment)

As you can see this new deduction and calculation is very cumbersome and not for the weary. With that said, this information is general in nature and should not be relied upon. As like most tax matters, there are exceptions to just about everything. Please be sure to consult a qualified (someone who has a focus on International tax) tax advisor to assist you with your foreign-derived intangible income.

Chris Morrison, CPA, MAFM