IRS issues final rules on FDII and GILTI deductions

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The Internal Revenue Service has released final regulations on deductions for two of the international tax regimes introduced under the Tax Cuts and Jobs Act of 2017: foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) for U.S.-based multinational corporations.

The final regulations offer guidance on both the computation of the deductions available and the determination of FDII. It also details the rules for the computation of FDII in the consolidated return context. The guidance released Thursday finalizes the reporting rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income.

The final regulations are mostly in line with the proposed regulations issued last year by the IRS and the Treasury Department, but they also took into account some of the comments they received in response to proposed rules. The final regulations eliminate the requirement in the proposed regulations to get specific types of documents to establish foreign person status, foreign use with respect to sales of certain general property that are made directly to end users, and the location of general services provided to consumers.

The final regs also take a more flexible approach to the types of substantiation required for foreign use with respect to sales of general property to non-end users, foreign use with respect to sales of intangible property, and with respect to determining whether services are performed for business recipients located outside the U.S. While the substantiation requirements in the final regs are more specific about the nature of the information required, they aren’t limited to a narrow set of documents. They also don’t contain the specific reliability requirement in the proposed regs because the reliability of documents or information can vary, depending on the circumstances.

“For example, documents created in advance of a sales date (such as a long-term sales contract) may be as reliable as documents created at the time of the sale, depending on the facts and circumstances," said the IRS. "Further, the final regulations continue to require that the substantiating documents be supported by credible evidence."

In addition, the applicability dates of the final regs have now been revised, though taxpayers are allowed to rely on the proposed regs for taxable years before the final regulations are applicable, including relying on the transition rules during the entire period.

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