Following Up on FDII Changes from March 2019
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Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.
Frank: Thanks. It’s exciting to be back.
Jen: I know there’s been some new changes to the Foreign-Derived Intangible Income, or FDII, as we’ve been calling it, that released in early March. What do we need to know about the new changes?
Frank: That’s right. Even though it’s interesting about this new tax law is that, even though it was passed a little over a year ago, guidance is still trickling in. Even though a law has been on the books, usually you do planning on a go-forward basis. There is some planning to go back and see about opportunities you may not have had.
One is this Foreign-Derived Intangible Income. It’s somewhat of a misnomer, because it applies to tangible property as well, so it does apply to export of goods and services, and essentially, it provides a deduction, a 37.5% deduction on this type of income, and the income is from the export of goods or providing services to foreign customers.
Jen: Are there any other highlights that somebody should know about the changes?
Frank: I’m glad you asked, because that’s one of the things that came out of the 177 pages of guidance that we just received—
Jen: Oh my gosh, wow.
Frank: Absolutely—is what services are covered: what is a foreign customer? What is foreign use? Because to apply for this deduction, the goods have to have foreign use. It can’t round trip back to the United States, and foreign customers have to be serviced if you are providing services.
Jen: We’ve also talked about IC-DISC and how it relates to FDII. What changes now are there, and should somebody still look at IC-DISC vs. FDII?
Frank: In my opinion, it’s actually a pretty exciting incentive as opposed to IC-DISC. For our listeners, IC-DISC has not died – it’s still available. While you can’t double dip, there is overlap and there are transactions that may qualify under one regime but not another, so you have to take a look at both. Comparing the two, the IC-DISC does need a separate entity in which to sell exports. The exports are pretty limited to the export of goods for an IC-DISC, and services are typically not covered, except there are some limited services. The rate of arbitrage that you get is 23.8% is the tax rate on this income earned out of a disc and distributed as a dividend.
In comparison with the FDII, the FDII does cover a wide range of services that the IC-DISC does not cover. The rate, effective rate on this taxable income is 13%. You don’t have to set up a special purpose vehicle in order to take advantage of the incentive, but you do have to have a C Corp, a regular domestic corporation to take advantage of it. That’s kind of a comparison and contrast.
Jen: Nice. It’s something that a company doing international business definitely wants to look at.
Frank: Absolutely, especially in the Houston area. This region of the country where port business is so important and everybody’s exporting, and exports are such a critical part of our economy. You’d be really remiss not to look at these opportunities.
Jen: You can’t not look at it.
Jen: Perfect. We’ll get you back to talk a little bit more in depth.
Frank: Thank you. There’s a lot to talk about.
Jen: Definitely. To learn more about other international topics, visit PKFTexas.com/InternationalDesk. This has been another Thought Leader Production, brought to you by PKF Texas – The Entrepreneur’s Playbook. Tune in next week for another chapter.