EU alleges FDII may violate international law

Tax Hot Topics newsletterThe Delegation of the European Union (EU) to the United States has suggested that the foreign derived intangible income (FDII) deduction provided under Section 250, and the proposed regulations issued thereunder, are most likely not compliant with U.S. obligations under the World Trade Organization (WTO) and other international obligations. It also suggested that the rules are “not fit to reduce tax avoidance and aggressive tax planning,” but rather encourage such activities by design.

It raised its concerns in a comment letter submitted this month on the proposed FDII regulations issued in March. See our prior coverage on the proposed regulations here.

Under Section 250, which was enacted by the Tax Cuts and Jobs Act (TCJA), U.S. corporations are entitled to 37.5% deduction on certain qualifying income earned from serving foreign markets, resulting in an effective tax rate of 13.125%. The EU claims that this deduction is, in effect, an export subsidy prohibited under the WTO Agreement on Subsidies and Countervailing Measures. It also alleges that the deduction can allow U.S. corporations to undercut tax rates in foreign countries, thus encouraging tax avoidance and aggressive tax planning.

The EU delegation noted that it has flagged these issues in the past, enclosing a December 2017 letter to Treasury Secretary Steve Mnuchin, and affirmed its commitment to work bilaterally or through international forums to “remove any discriminatory elements” of the TCJA.

David Sites
Washington National Tax Office
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David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

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