New IRS regulations issued Monday make it easier for companiesto claim a tax break for exporting their made-in-America goods andservices.

The release of the regulations gives corporations a first lookat what they need to do to claim a new deduction in the 2017 taxoverhaul, which could lower their export income tax to about 13percent from 21 percent.

From airlines to defense companies, the Internal Revenue Serviceclarified that certain industries can claim a sizable deduction forthe income they earn from selling goods and services made in theUnited States overseas.

The deduction for foreign derived intangible income, or FDII,was designed to encourage American companies to produce more in theUnited States. The law cut the corporate tax rate to 21 percentfrom 35 percent and moved the U.S. toward a territorial tax system,so companies don't owe the full U.S. tax rate on foreignincome.

The FDII provision works in tandem with the levy on globalintangible low-taxed income, or GILTI, which taxes profits made incountries that didn't tax them in the first place.

Designers of the Republican tax law hoped the two measures wouldlevel the playing field. Since it was enacted, companies payroughly the same amount of tax on exports made in the U.S. as theydo on profits earned offshore.

So far, the FDII deduction hasn't stopped U.S. manufacturersfrom moving overseas. Motorcycle manufacturer Harley Davidsonannounced in May that it will build a plant in Thailand to sell inAsian markets. General Motors Co. said in November that it wouldclose four factories in the U.S. by the end of 2019. The carmakerplans to shift some production to Mexico.

“Companies are not necessarily changing their whole mode ofoperation to take advantage of it,” says Derek Schraw, a partner ataccounting firm Deloitte Tax. “If companies are going to move theirintellectual property, people, or business, it's going to be forbusiness considerations as opposed to tax purposes.”

FDII could also face a challenge. Tax professionals disagreeabout whether the measure is compliant with World TradeOrganization (WTO) rules, so another country could try to get theU.S. to repeal or modify the measure.

“There is still a concern that WTO foreign trading partners willcontinue to challenge FDII as an illegal export subsidy,” saysLarry LeBlanc, a partner at accounting firm RSM.

Such a challenge would likely take years to resolve, and anyrepeal is not likely to be retroactive, so companies can expect tobenefit in the interim.

Corporations are double-checking their supply chains to makesure they can qualify for the $63.8 billion tax break in PresidentDonald Trump's tax law. The rules clarify that defense contractorscan get the deduction when they sell to foreign governments, apoint that had confused the industry. Federal law requires them tosell weapons and missile defense systems through the Department ofDefense instead of directly to the buyer.

The substantial tax break has encouraged companies, such asretailers that manufacture domestically and sell overseas, to makesure that their exports qualify for the deduction, LeBlancsays.

The IRS rules also matter to companies that provide transportservices, such as United Continental Holdings Inc. The airlineasked the Treasury Department in September to clarify that thededuction applies to services offered while in transit between twocountries. The rules say U.S. airlines can get the full deductionon flights that begin and end in foreign countries. Half of theincome from flights that either originate or terminate in the U.S.qualify for the tax break.

The IRS also made the tax burden a little lighter forindividuals who choose to be treated like a corporation for taxpurposes. Individuals can gain access to the benefits of the newinternational tax system, but doing so comes with a cost. Those taxbreaks come with significantly more paperwork, a function of howthe tax code treats individuals who want to pay the lower corporaterates, says John Harrington, a partner at Dentons in Washington andchair of the Bloomberg Tax International Advisory Board.

FDII has received much less attention from corporatetax accountants than has GILTI, says Jonathan Brenner, a member atlaw firm Caplin and Drysdale. Companies have been more focused onGILTI because it takes away something they used to have—the abilityto defer taxes on offshore cash indefinitely—and now requires themto pay at least some tax on those profits.

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