Representative Kevin Hern (OK-01) sent a letter this afternoon to Janet Yellen, the secretary for the Department of the Treasury, regarding Foreign Derived Intangible Income (FDII) deductions.  The Biden Administration is working to eliminate FDII which would put globally engaged U.S. companies at a significant disadvantage. This letter urges Secretary Yellen to reconsider repealing the FDII. All Republican Members of the Ways and Means Committee signed the letter. 

The letter can be found here and below.

July 28, 2021

The Honorable Janet Yellen

Secretary

Department of the Treasury

1500 Pennsylvania Avenue, N.W.

Washington, DC 20220

Dear Secretary Yellen,

As Members who care deeply about research and development, manufacturing, and jobs here in the United States, we are writing to express concern about the elimination of the foreign derived intangible income (FDII) deduction in the Administration’s proposed FY 2022 budget.  

Currently, FDII provides an important counterbalance to global intangible low-taxed income (GILTI) to keep successful research and development (R&D) in the U.S, create valuable intellectual property (IP) here, and even redomicile IP that is acquired or created overseas. FDII provides this parity with GILTI to discourage offshoring through a lower, 13.125% rate on high-return income, effectuated through a 37.5% deduction from income taxed at the 21% headline corporate rate. By eliminating the FDII deduction, and combined with the proposal to increase the corporate tax rate, the Administration’s budget proposal would be detrimental to U.S. competitiveness and job growth.

FDII also supports innovation and investment. FDII encourages high-return advanced manufacturing to be performed in the U.S. Businesses often establish R&D centers and supply chains around where their high-return intellectual property is located. These activities create well-paying jobs. Moreover, bringing highly mobile intellectual property into the U.S. from low-tax jurisdictions provides the U.S. the primary right to tax (as opposed to only a secondary right if taxed under GILTI), boosting U.S. revenue.  

While the Administration’s budget proposes reinvesting revenue raised by FDII into an unspecified R&D spending incentive, we are concerned that any such incentive will not be able to keep American-developed IP at home or encourage companies to domesticate IP as well as FDII. Moreover, that trade-off conflates provisions that serve distinct purposes, both of which encourage domestic innovation.  

Research incentives, while certainly valuable, serve as “input” measures—reducing the cost of research on the front-end, whether or not that research is successful. In contrast, FDII—in addition to providing parity with GILTI to discourage tax-motivated offshoring—serves a purpose that is complimentary to research incentives: it is a type of “output” measure that rewards successful research, leading to more investment in innovation.  

IP boxes have been enacted in 19 of 37 OECD countries, so retaining FDII is critical for the U.S. to keep pace in the global innovation race. At the same time, we stand ready to work with the Administration on legislation to improve our competitive standing on R&D. Countries like China already permit businesses to deduct up to 200% of their R&D costs, and we should develop bipartisan solutions that complement FDII and promote U.S. innovation.

We know that when the businesses and workers in our districts have a level playing field, they can compete and win, even in an increasingly competitive global marketplace. We believe that the FDII regime provides our businesses and workers that level playing field and encourages businesses to expand their activity on U.S. soil. We urge the Administration to reconsider its elimination in order to preserve American IP, and the valuable economic activity that follows it, and protect our R&D and innovative jobs. 

Sincerely,

The Additional Ways and Means Members are:

Kevin Brady (TX-08), Devin Nunes (CA-22), Adrian Smith (NE-3), Jodey C. Arrington (TX-19), Vern Buchanan (FL-16), Ron Estes (KS-04), Drew Ferguson (GA-03), Mike Kelley (PA-16), Darin LaHood (IL-18), Carol D. Miller (WV-03), Tom Reed (NY-23), Tom Rice (SC-07), David Schweikert (AZ-06), Jason Smith (MO-08), Lloyd Smucker (PA-11), Jackie Walorski (IN-02), Brad R. Wenstrup (OH-02)

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