TEI Submits Comments Regarding FDII and GILTI Deductions.

• Position: Tax Executives Institute, foreign derived intangible income, global intangible low taxed income

On May 6, TEI submitted comments to the Internal Revenue Service and U.S. Department of the Treasury regarding proposed regulations on the new section 250 deductions for foreign-derived intangible income and global intangible low-taxed income. TEI's comments were prepared under the aegises of the Institute's U.S. International Tax Committee and Tax Reform Task Force, whose chairs are Sarah Winters and Emily Whittenburg, respectively. Benjamin R. Shreck, TEI Tax Counsel, coordinated the production of TEI's comments.

On March 6, 2019, the Internal Revenue Service (the Service) and the U.S. Department of the Treasury (the Treasury) published proposed regulations (the Proposed Regulations) (1) under new section 250, (2) which provides a deduction for domestic corporations with respect to their foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). Section 250 was enacted as part of Public Law 115-97, (3) colloquially known as the "Tax Cuts & Jobs Act" (the Act). The Treasury and Service (collectively, the Government) requested public comments regarding the Proposed Regulations no later than May 6, 2019. On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the Government's request for comments.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 57 chapters in North and South America, Europe, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our more than 7,000 individual members represent over 2,800 of the leading companies around the world.

TEI members are responsible for administering the tax affairs of their companies and must contend daily with provisions of the tax law relating to the operation of business enterprises, including the new FDII and GILTI regimes, along with many other aspects of the Act. We believe that the diversity and professional experience of our members enables TEI to bring a balanced and practical perspective to the issues raised by the Proposed Regulations, and we are eager to assist the Government in its critical effort to effectively and efficiently implement the Act.

TEI Comments

Documentation Requirements for Foreign Use

The documentation requirements set forth in Prop. Treas. Reg. [section][section] 1.250-4(d)(2)(i) "Determination of foreign use," and 1.250-4(d)(2)(H) "Determination of domestic use," are burdensome and present significant compliance difficulties. For example, the requirements would interfere with the ability of retail businesses to nimbly serve their customers by sourcing small amounts of inventory from locations in close geographic proximity to the United States. More importantly, the documentation the Proposed Regulations require multinational businesses to obtain is not the type of documentation such a business would reasonably expect customers to provide (e.g., foreign identification, whether property incorporated into a second product as a component is "no more than 20 percent of the fair market value of the second product, determined when the second product is completed" (4)). In addition, some of the documentation set forth in the Proposed Regulations is information customers could not reliably provide, or represent as accurate, even if they were willing to provide the information (e.g., a statement that the property is "not subject to a domestic use within three years of the date of delivery" (5)). To present a simple example, a taxpayer may sell goods to a large multinational retailer with an address in one location, and yet ship the goods to an address in another location (such as a regional warehouse), and the retailer may then ship the goods to a customer in a third location. When the retailer purchases the goods in the first step of this chain, it would be difficult if not impossible for the retailer to accurately represent that the goods will never be used in the United States within the next three years.

Similarly, taxpayers who leverage third-party retail partners to sell the taxpayers' products often do not have clear insight into the ultimate location in which the product is consumed. Typically, the contracts with third-party distributors clearly define sales territories, however, such a requirement does not always prevent a third-party retailer from transferring property to another of its sales jurisdictions for compelling business reasons. To ameliorate this issue, the special rules for small business and small transactions outlined in Prop. Treas. Reg. [section] 1.250(b)-4(d)(3)(ii) should be expanded to apply to larger businesses if small amounts of inventory supplied to a foreign related party are used to satisfy minor U.S. inventory shortfalls.

Regarding the requirements documenting the foreign use of "general property," Prop. Treas. Reg. [section] 1.250(b)-4(d)(3)(i) states that acceptable documentation establishing such foreign use includes:

(A) A written statement from the recipient or a related party of the recipient that the recipient's use or intended use of the property is for a foreign use (within the meaning of paragraph (d)(2) of this section); (B) A binding contract between the seller and the recipient which provides that the recipient's use or intended use of the property is for a foreign use .... As a threshold matter, this regulation appears to require recipients to specifically trace the use of all the property it purchases, which includes being able to determine that "[t]he property is not subject to a domestic use within three years of the date of delivery ...." (6) In TEI's view, this places an intolerable burden on recipients, especially unrelated recipients, to predict the future use of property the recipient...