US FDII deduction among international ‘harmful tax practices’ slated to be abolished

By Doug Connolly, MNE Tax

An update on reviews of preferential tax regimes published by the OECD on August 5 states that the US foreign-derived intangible income (FDII) regime is “in the process of being eliminated.”

The new report includes updated conclusions with respect to 18 designated preferential tax regimes. The updates were approved by the 139-jurisdiction “Inclusive Framework on BEPS” in June after being adopted by the OECD Forum on Harmful Tax Practices in April. The reviews are undertaken in the context of the OECD’s base erosion and profit shifting (BEPS) Action 5 minimum standard on harmful tax practices.

Regarding the US, the status of the FDII regime has been updated to reflect that the US “has committed to abolish” the provision, which provides a deduction in connection with US corporation’s intangible income derived from exports.

The Biden Administration has proposed repealing the FDII provision, which was enacted as part of the 2017 tax reform. However, the proposed repeal would still have to pass the US Congress.

Other deemed harmful tax regimes updated to “in the process of being amended” include two Dominican Republic regimes, special economic zones in Gabon and Jordan, and a St. Martin tax-exempt company regime.

One regime’s status has been updated to “abolished”: an Australian offshore banking regime. Grandfathering of the regime will be permitted in accordance with the Forum on Harmful Tax Practices’ timelines.

The Philippines’ regional operating headquarters regime has been updated to “potentially harmful but not actually harmful,” as previously announced by the Philippines Department of Finance. The regime is scheduled to be abolished on January 1, 2022, without grandfathering.

One regime has had its status updated to “harmful”: Trinidad and Tobago’s free trade zones. The regime had previously been listed as “in the process of being eliminated.” However, the Forum on Harmful Tax Practices has updated the regime’s status due to the country’s failure to meet agreed timelines.

The Forum for Harmful Tax Practices also announced several new regimes under review in Armenia, Eswatini, Honduras, Lithuania, and Pakistan. In addition, it has deemed two reviewed regimes “not harmful”: Hong Kong’s profit tax concessions for certain insurance companies and a Georgian international company regime.