FOREIGN DERIVED INTANGIBLE INCOME
WHAT IS IT?
Foreign Derived Intangible Income (FDII) refers to income derived from intangible assets, such as copyrights, trademarks and patents. FDII was included in Section 250 of the 2017 Tax Cuts and Jobs Act, with the purpose of lowering the tax rate on income from exports of goods and services of American multinational corporations. Governments globally seek to incentivize location of intellectual property because it is associated with high-value jobs that accompany patents, copyrights and trademarks. IP is a critical component of our economy today, contributing to everything from vaccines to the software we use daily. FDII was created as an incentive for domestic investment of intangible assets and to encourage multinational companies to repatriate IP to the United States. FDII is especially applicable to software, steaming, and app related firms but is also critical to businesses that create movies and for consumer brands that are sold globally but maintain trademarks in the U.S. If we let FDII be repealed, competitor countries like China will gain an advantage with increased IP and innovation from the United States.
ISSUES WITH REMOVING FDII
FDII is paired elegantly with Global Intangible Low-taxed Income (GILTI) so that the US tax code is neutral with respect to location of IP making it a cost-effective means of encouraging development, maintenance or repatriation of IP to the US. The Made in America Tax Plan would increase GILTI while repealing and replacing FDII, meaning the overall tax burden of American firms would increase, and incentive to be based in America would decrease.
Following the implementation of FDII in 2017, there was a nearly 130% increase in IP based in the United States, Google, Cisco, and Qualcomm being three of the major corporations who repatriated their IP, bringing jobs and profits back into the United States to benefit the American economy. Through the FDII deduction, Qualcomm saved $800 million in the years 2019 and 2020 combined. Without FDII, Qualcomm and others will have an increased tax burden, potentially harming the domestic economy or resulting in their expatriation of the United States to foreign domains, reducing American jobs for these companies.
Prior to enactment of FDII, American companies were subject to takeovers or inversions because foreign businesses paid less tax on the income earned from IP. To keep America competitive and avoid inversions, takeovers, and expatriation of large U.S. companies, tax incentives such as FDII are critical. When IP is moved offshore, the jobs that support it are moved offshore reducing innovation and competitiveness of the American economy. The FDII incentive is critical for domestic investment, competition, and to ensure the American economy is innovative and prosperous. Eliminating FDII discourages multinational firms from bringing their profits back to the United States by increasing their tax burden.