With the IRS finalizing the rules related to the foreign-derived intangible income (FDII) deduction under Sec. 250 (TD 9901), now might be the time to review your contracts that involved sales to foreign customers. This can include contracts involving the payment of royalties for the use of US intangibles that are used oversees.
The final regulations require US taxpayers to have credible evidence of foreign use of an export and not just proof that it was shipped to and received by the foreign customer. For intangibles, this required proof is that the product made from use of the intangible was used outside the US. This is different from the IC-DISC rules (which normally do not apply to intangibles to the same extent as the FDII provisions) that only required proof that the product was shipped to a foreign address to take advantage of the DISC benefit.
The problem for US taxpayers will be that the type of information and documentation required may not have originally been addressed in the contract with the foreign customer. Now, the foreign customer must be approached to provide additional information that may not be readily available, or that they might consider to be proprietary.
The final regulations provide a level of flexibility that will allow companies to collect credible evidence outside of the normal channels of information provided from the foreign customer, but this will need to be evaluated. And, if US taxpayers now ask for additional information, the foreign customer may want a benefit (or to share some of the tax benefit if they are aware of FDII) in return for providing the additional information.
With the COVID 19 pandemic, many businesses are examining the way they do business and how they interact with their customers. This might actually provide the cover needed to raise this topic without having to give up a benefit that can occur in a renegotiating situation. To see some of the documentation needed for foreign royalties, see our GlobalVIEW posting of May 7, 2019.