The 2017 Tax Cuts and Jobs Act (TCJA) was the first major overhaul of the U.S. tax system in 30 years. While many Americans are probably aware of the tax cuts associated with the Act, the reform elements of the TCJA are perhaps the most significant. After decades of losing competitive ground with our major trading partners, the U.S. finally modernized its business tax system. This reform effort included a comprehensive rewrite of the international tax system.
One of the key reforms was the creation of the Foreign-Derived Intangible Income (FDII) deduction. As lawmakers grapple with the “One Big Beautiful Bill,” preserving this incentive should be a central goal.
FDII was created to solve a real problem: American companies were moving valuable assets such as patents, software, and trademarks offshore. Before the TCJA, the U.S. tax system was wildly outmoded. The U.S. taxed its businesses at one of the highest rates in the world and subjected them to an inefficient international tax system that had been largely abandoned by major trading partners.
Indeed, most of the U.S. trade partners had adapted to the times and lowered business tax rates, and many foreign countries taxed intellectual property (IP) income at much lower rates. This pushed U.S. firms to hold IP overseas in places like Ireland, Bermuda, or the Netherlands.
As part of the 2017 tax reform, FDII has helped level the playing field by offering a lower tax rate (around 13 percent) for profits earned from U.S.-based IP sold abroad. FDII is designed as a “carrot,” incentivizing firms to hold IP in the U.S. It works alongside the “stick” of Global Intangible Low-Taxed Income (GILTI), which is designed to mitigate the advantage of locating income in lower-tax jurisdictions.
The results have been clear, as a new study from Pinpoint Policy Institute makes clear. From major companies like Microsoft, Alphabet, Meta, and Nike, to smaller manufacturers investing in local communities, FDII has had a noticeable impact on firm behavior. Royalty payments, which previously flowed through tax havens, shifted significantly toward the U.S. One striking example is that between 2017 and 2020, Ireland’s outbound royalty payments to the U.S. surged from €2 billion to nearly €24 billion per quarter.
Bringing IP back home has benefits beyond tax collections. When companies hold intellectual property (IP) in the U.S., they often keep related activities here as well – such as research and development (R&D), product design, and advanced manufacturing. For example, Microsoft announced a $3.3 billion investment in Wisconsin, which will involve building a new AI lab and creating thousands of jobs. FDII played a part in making that decision more attractive.
Some critics claim FDII is just a corporate giveaway. But that misses the bigger picture. While large firms have used the deduction most, the economic benefits extend much further. Local suppliers, mid-sized exporters, and entire communities have seen growth as a result of FDII-driven investments. For example, FDII was directly credited for encouraging a Kentucky-based fan manufacturer to bring production back from Malaysia, while the provision was similarly credited for the expansion of a manufacturing facility in Tennessee for a family-owned U.S. business.
At its core, FDII acknowledges an important reality: intellectual property is highly mobile in today’s world. Countries compete fiercely to attract it. Many nations offer “patent box” regimes with very low tax rates to lure IP assets. If America doesn’t stay competitive, we risk losing not just tax revenue but also innovation, manufacturing, and high-skill employment.
FDII has helped the U.S. stay ahead. It’s no coincidence that America continues to be a global leader in technology, life sciences, and high-end manufacturing. But maintaining that lead takes smart policy. Weakening or repealing FDII would hand a major advantage to foreign competitors.
FDII’s future is subject to some uncertainty. Starting in 2026, its benefits are set to shrink, raising the tax rate on export-based IP income. While Congress appears poised to largely retain FDII as it debates the “One Big Beautiful Bill,” risks remain. The tax reform effort is now reaching crunch time, and every policy provision is in competition with other tax policy priorities. Policymakers will need to weigh tradeoffs as they consider which policies to retain, reform, or remove altogether.
For FDII, the choice facing Congress is straightforward. Lawmakers can safeguard a policy that has clearly benefited the U.S. economy. Or they can undo progress, risking a renewed outflow of American innovation and jobs. The data and real-world examples plainly make the case.
