On Monday, March 4th the IRS announced new regulations that will allow companies to lower their export income tax from 21% to 13%.
The new regulation addresses what is known as FDII (foreign derived intangible income) in an effort to encourage manufacturers to produce more products domestically. Under the rules, companies will pay almost the same tax on U.S. manufactured exports as they do on offshore profits, thus leveling the playing field.
The new deduction may seem positive, but it is not without its critics. Derek Schraw, a partner at at Deloitte Tax said, “Companies are not necessarily changing their whole mode of operation to take advantage of it. If companies are going to move their intellectual property, people or business, it’s going to be for business considerations as opposed to tax purposes.” The measure also faces international challenges. There is some discussion on whether or not the measure complies with World Trade Organization rules. “There is still a concern that WTO foreign trading partners will continue to challenge FDII as an illegal export subsidy,” said Larry LeBlanc, a partner at accounting firm RSM.
Regardless of future challenges, which would take years to sort out, the new tax break offers benefits to a wide variety of organizations. Defense contractors qualify for the deduction when selling to foreign governments through the Department of Defense, airlines qualify for the deduction on profits from flights that begin and end in a foreign country and individuals who, for tax purposes, choose to be treated as a corporation. Logistics companies will also reap the benefits of the tax break on profits earned from transit services between foreign nations.
In recent months manufacturing giants Harley Davidson and General Motors have both announced plans to move manufacturing offshore, with Harley Davidson moving some production to Asia and General Motors closing several factories in favor of building the cars in Mexico. The new tax deduction aims to encourage manufacturers to move closer to a territorial tax system. Time will tell if the measure will entice manufacturers to export rather than relocate.