FDII Calculation Example of Foreign Derived Intangible Income

FDII Calculation Example (Foreign Derived Intangible Income)

FDII Calculation Example of Foreign Derived Intangible Income: The IRS makes International Tax Law is very difficult — and very acronym heavy. With the introduction of the TCJA (Tax cuts and Jobs Act) came two new acronyms to the game: GILTI (Global Intangible Low-Taxed Income) and FDII (Foreign Derived Intangible Income). GILTI a is more commonly found phrase, since it is more encompassing. The purpose behind FDII is to lure companies into relocating certain assets back to the US, which will in turn result in a deduction of certain foreign income — and a reduced tax rate on that portion of the income. Stated another way, the purpose of FDII is to lure businesses with foreign income to bring assets onshore — and the reward is a tax deduction. The calculation is very complicated, but we have provided a basic example below to illustrate the concept. Let’s walk through an FDII Calculation Example of Foreign Derived Intangible Income.

How FDII Definition

FDII refers to Foreign Derived Intangible Income. It is defined under Internal Revenue Code section 250. The concept behind FDII is to allow a certain deduction for a percentage of income generated from sales abroad.

IRC 250(a) & (b)

• • • (a) Allowance of deduction

      • (1) In general In the case of a domestic corporation for any taxable year, there shall be allowed as a deduction an amount equal to the sum of—

        • (A) 37.5 percent of the foreign-derived intangible income of such domestic corporation for such taxable year, plus

        • (B) 50 percent of— (i)the global intangible low-taxed income amount (if any) which is included in the gross income of such domestic corporation under section 951A for such taxable year, and (ii) the amount treated as a dividend received by such corporation under section 78 which is attributable to the amount described in clause (i).

    • (2) Limitation based on taxable income

      • • (A)In general If, for any taxable year—

          • (i) the sum of the foreign-derived intangible income and the global intangible low-taxed income 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).

    • (B) Reduction

      • For purposes of subparagraph (A)—

        • (i) foreign-derived intangible income shall be reduced by an amount which bears the same ratio to the excess described in subparagraph (A) as such foreign-derived intangible income bears to the sum described in subparagraph (A)(i),and

        • (ii) the global intangible low-taxed income amount shall be reduced by the remainder of such excess.

Calculating FDII

Computing FDII can be unnecessarily complicated, but for purposes of this introductory article the IRS summary is a good baseline, followed by a layman explanation (with example).

As provided by the IRS:

The FDII deduction under section 250 comes down to two basic questions:

• • • What is the intangible income a domestic corporation is deemed to produce?

    • What part of this intangible income is foreign derived?

Taxpayers answer these questions by following these 4 steps:

• • • Step 1. Determine Deduction Eligible Income (DEI)

    • Step 2. Calculate Deemed Intangible Income (DII)

    • Step 3. Determine Foreign-Derived Deduction Eligible Income (FDDEI)

    • Step 4. Calculate the FDII deduction under section 250 using the amounts determined in steps 1 through 3

Step 1. Determine Deduction Eligible Income (DEI)

DEI is the excess of a domestic corporation’s gross income, without regard to certain excluded categories of income, over the deductions properly allocable to such gross income.

Excluded Categories of Income:

• • • Amounts included in gross income under section 951(a)(1) (including section 78 gross up amounts);

    • Global Intangible Low-Taxed Income under section 951A (including section 78 gross up amounts);

    • Financial services income (as defined in section 904(d)(2)(D) and Treas. Reg. § 1.904- 4(e)(1)(ii));

    • Dividends received from a CFC;

    •  Domestic oil and gas extraction income; and

    • Foreign branch income (as defined in section 904(d)(2)(J)).

Deductions Properly Allocable:

• • • The domestic corporation’s deductions (including taxes) are then properly allocated to gross DEI to arrive at DEI.

What does this Mean?

It means that in order to first determine what is considered deduction eligible income, the taxpayer must determine the gross income exclude categories of income that are not included as part of DEI — these exclusions are listed above, In addition to applying deductions that will allocate accordingly in order to determine the applicable DEI.

Step 2. Calculate Deemed Intangible Income (DII)

• • • DII means the excess (if any) of the domestic corporation’s DEI, over the corporation’s Deemed Tangible Income Return (DTIR).

    • DTIR is an estimation of the corporation’s income attributable to its tangible assets and is defined as 10% of the corporation’s Qualified Business Asset Investment (QBAI).

    • QBAI is the domestic corporation’s average aggregate adjusted basis, determined quarterly, in specified tangible property.

• • • Specified tangible property is any depreciable tangible property that is utilized in the production of gross DEI for the taxable year.

What does this Mean?

It means that after DEI is determined, the Taxpayer must next calculate the DII, which is essentially the amount of DEI over the corporations DTIR (+10% of QBAI for each CFC).

Step 3. Determine Foreign-Derived Deduction Eligible Income (FDDEI)

• • • FDDEI is any DEI which is derived in connection with:

    • PROPERTY which is SOLD by the taxpayer to any person who is not a United States person, and which is for a foreign use; or

    • SERVICES provided by the taxpayer to any person, or with respect to property, not located within the United States.

    • FDDEI is a subset of DEI. Because DEI is a net income amount, it is important that FDDEI is likewise a net amount. A domestic corporation’s deductions must be properly allocated to gross FDDEI to arrive at FDDEI.

    • FDDEI Sales include sales of property by the taxpayer:

      • to a foreign person, and

      • for a foreign use.

    • Sales include any lease, license, exchange, or other disposition.

    • Foreign use means any use, consumption, or disposition which is not within the U.S.

    • FDDEI Sales do not include sales to another person (other than a related party) for further manufacture within the U.S., even if such other person subsequently uses the property for a foreign use.

    •  Related party transactions: Foreign use does not include sales to related parties unless the sale is followed by a sale or service to an unrelated foreign person, where such property is for foreign use

Step 4. Calculate the FDII deduction under section 250 

• • • Once the components in Steps 1 through 3 have been determined, a domestic corporation’s FDII can be computed.

    • This is accomplished by multiplying Deemed Intangible Income (DII Step 2) by the Foreign Derived Ratio (FDR). The FDR is the ratio of the corporation’s Foreign-Derived Deduction Eligible Income (FDDEI Step 3) over Deduction Eligible Income (DEI Step 1) for the year.

    • FDII is then multiplied by 37.5% (21.875% for taxable years beginning after 2025) to arrive at the FDII deduction under section 250.

    • This amount is reported on a domestic corporation’s Form 1120, Schedule C.

    • Reminder: If the sum of FDII and GILTI exceeds taxable income, then FDII and GILTI will be limited. FDII will be reduced by the same ratio to total excess taxable income, as such FDII bears to the sum of FDII and GILTI. And GILTI will be reduced by the remainder of such excess.

FDII Calculation Example Explained

Let’s let’s work through an FDII calculation example (this is just an introductory example and it can get much more complicated from here in just trying to determine DEI).

• • • DEI  = $250,000

      • DEI = Deduction Eligible Income refers to a domestic corporations gross income after excluding certain categories — over deductions applicable to the gross income considered as DEI

    • FDDEI = $50,000

      • FDEEI = this refers to the foreign portion “foreign derived” of the DEI

    • QBAI = $300,000

      • QBAI = Qualified Business Asset Investment and 10% = 30,000

FDII Equation

Acronyms

• • • • FDDEI: Foreign Derived Deduction Eligible Income

      • DEI: Deduction Eligible Income

      • QBAI: Qualified Business Asset Investment

      • DTIR: Deemed Tangible Income Return

      • DII: Deemed Intangible Income

FDII

• • • • FDDEI/DEI * DEI – (10% * QBAI)

      • $50,000/250,000 * 250,000 – 10% of QBAI

      • 1/5 * 250,000 – 30,000

      • 1/5 * 220,000 = $44,000

FDII Deduction

• • • • $44,000 * 37.5 = Deduction

      • $44,000 * 37.5 = $16,500

Taxable FDII

• • • • $44,000 – $16,500 = $27,500

FDII Calculation Summary

• • • • DEI =$250,000

        • Total Amount of Income

      • FDDEI = $50,000

        • Foreign Portion of the Income

      • DII = DEI of 250,000 – QBAI of $30,000 = $220,000

        • Total Income minus 

      • FDII = DII of $220,000 * (50,000 of FDDEI/250,000 of DEI) = $44,000

      • FDII = $44,000

      • FDII Deduction = 44,000 * 37.5 = $16,500

      • Taxable FDII = 44,000 – 16,500 = $27,500

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