Innovation Policy: Congress Moves to Sustain FDII Deduction

• FDII has led to a meaningful increase in onshored intellectual property and U.S.-based R&D.
• Export-driven investment and manufacturing are benefiting communities nationwide.
• Congress is poised to preserve the essential incentive effects of  FDII at a favorable rate, which will continue to encourage domestic investment.

With the House and Senate advancing reconciliation packages, it now appears increasingly likely that key elements of the 2017 Tax Cuts and Jobs Act (TCJA) will be essentially retained. Among them is the Foreign-Derived Intangible Income (FDII) deduction, a provision designed to encourage U.S. firms to keep intellectual property (IP) and related profits at home. While minor technical adjustments are likely, both chambers appear aligned in preserving FDII’s core structure, signaling a bipartisan recognition of its economic value.

A Pinpoint Policy Institute primer underscores the policy logic underpinning the original FDII provision’s design and highlights its continued relevance:

• FDII complements other international tax  provisions like GILTI and BEAT, balancing enforcement (“sticks”) with incentives (“carrots”) to keep economic activity stateside.
• The deduction mimics foreign “patent box” regimes and ensures U.S. tax competitiveness for mobile, high-return IP income.
• Bipartisan legislation has been introduced to make the deduction more generous, while House and Senate versions of the reconciliation bill preserve a lower rate than current law would otherwise allow.

A companion Pinpoint Policy Institute analysis lays out the strong empirical case for FDII. The deduction has

• Incentivized the onshoring of IP by major firms that subsequently expanded U.S. R&D and data center investments.

• Boosted export activity, with measurable relocation of income associated with intellectual property. 

• Supported domestic supply chains and small manufacturers, such as a Kentucky fan company that reshored jobs from Malaysia to Lexington.

Ultimately, FDII was designed to operate in conjunction with other elements of the modern U.S. international tax system within the context of a global economy. Congress now seems poised to essentially preserve this provision, which will continue to incentivize the reshoring of IP and valuable spillover investment in domestic innovation.