Export Tax IC DISC Revenue
-
Upload
international-tax-magazine-david-greenberg-phd-msa-ea-cpa-tax-group-international-646-705-2910 -
Category
Documents
-
view
18 -
download
1
Transcript of Export Tax IC DISC Revenue
“Seeing beyond the numbers...”
Increasing IC-DISC Revenue– Maximize the Export Tax Incentive
Jonathan Lysenko
May 20, 2009
“Seeing beyond the numbers…”
The IC-DISC Tax Benefit
Benefit: Qualified US exporters get a permanent 20% tax savings• A US exporter sets-up a paper company; a conduit for export sales• US exporter pays a commission to the IC-DISC -- deduction at
35%• IC-DISC pays a dividend to its shareholders – taxed at 15%
Good Candidate: • Exporter of US- manufactured products with > 50% US content• Engineers and architects with construction projects outside the US• US taxpayer should be profitable (i.e., tax-paying) in the US• S-Corps, LLCs, and privately-held C-Corps
2
“Seeing beyond the numbers…”
Safe Harbor Commission IC-DISCIRC Sec. 991 - 997
Overview:
• The “safe harbor” commission amount is treated as income to the IC-DISC and is tax deferred up to $10,000,000 of FTGR and taxed as a dividend when distributed to US parent or affiliate.
• The “safe harbor” commission is calculated at 50% of combined taxable income (CTI), 4% of foreign trading gross receipts (FTGR), or marginal costing whichever method yields the greatest benefit (IRC Sec. 994(a))
Client Impact:
• Entirely transparent no change to client’s current business operations
Business Impact:
• US Parent must set up paper company with separate books and bank accounts
CTI Transfer amount up to 50% or 4% of FTGR
3
“Seeing beyond the numbers…”
Increase the IC-DISC Benefit
Maximize Export Gross Receipts:• Related & Subsidiary Services• Export Promotion Expenses
Select Best Pricing Method:• Transaction by Transaction Pricing• Marginal Costing
Add Functions & Risks:• Buy / Sell IC-DISC• Factoring Export Receivables• Foreign International Sales Corporation
4
“Seeing beyond the numbers…”
Maximize Export Gross Receipts
Related & Subsidiary Services: • FTGR includes R&S Services within the Controlled
Group• Subsidiary if less than 50% of the total of Sales and
Service Income• Including but not limited to - Warranty, Repair,
Maintenance, Transportation• Does not include Financing and Interest
5
“Seeing beyond the numbers…”
Maximize Export Gross Receipts
Export Promotion Expenses: • Export Promotion Expenses paid by IC-DISC are
reimbursed by US Exporter at cost plus 10%• Export Promotion Expenses are expenses incurred by
IC-DISC to advance export sales, including– Advertising– General and administrative expenses– Freight and shipping– Packaging, designing and labeling, etc.
6
“Seeing beyond the numbers…”
Select Best Pricing Method
“T by T Approach”: • Commonly a 50% Increase in IC-DISC Benefit• Determine Benefit Under Three Possible Methods:
– 4% Gross Receipts Method– 50% Full Cost CTI Method– 50% Marginal Costing CTI Method
Good Candidate: • Profit Variability (Product, Customers, Time of Yr., etc.)• Available Sales & COGS by Transaction
7
“Seeing beyond the numbers…”
Select Best Pricing Method
Maximization Tips: • 50% FC CTI if net profit is > 8%• 4% Gross Receipts if net profit is < 8%• Use Marginal Costing if Overall Profit Percentage is > FC
CTI % and > 8%• Transactional is the most beneficial overall method• In addition – selective grouping is needed for
maximization
8
“Seeing beyond the numbers…”
Select Best Pricing Method Example
9
Sales 925 200 100 300 325 COGS 560 50 60 250 200 Gross Profit 365 150 40 50 125 Deductions 185 100 45 40 - TI (Full-Cost CTI) 180 50 (5) 10 125
OPP 19% 25% -5% 3% 38%
4% Gross Receipts 24 8 4 12 50% FC-CTI (30 if TxT)) 28 25 (3) 5
Best Method 41 25 4 12
Marginal Costing - MC-CTI 150 40 50 - OPPL 39 19 58
MC-Method 19 10 25
Now Best Method 60 25 10 25
“Seeing beyond the numbers…”
Buy/Sell IC-DISCIRC Sec. 994
Overview:
• Rather than a commission, the IC-DISC buys and sells qualified export inventory• Essential to meet the 95% qualified export assets test
Client Impact:
• Customer sees the IC-DISC as issuer of the invoice
Business Impact :
• IC-DISC performs Back office invoicing • Requires a Section 482 Transfer Pricing Study
Average CTI transfer amount 66% - 70%
10
“Seeing beyond the numbers…”
Export Invoice FactoringRev. Rul. 75-430, Rev. Rul. 79-362
Overview:
• The IC-DISC adds a new source of revenue – factoring income• Factoring income is derived from purchasing the invoices associated with commission
income• The invoices are discounted at a 4%-5% rate – the discount is additional IC-DISC
income
Client Impact:
• Customer sees the IC-DISC handling both invoicing and collections
Business Impact:
• IC-DISC performs Back office invoicing • IC-DISC takes on Account Receivable services (assumes credit risk)• Requires a IRC Sec. 482 Transfer Pricing study
Average CTI transfer amount – 70% to 75%
11
“Seeing beyond the numbers…”
Foreign International Sales Corporation “FISC” IRC Sec. 993(e)(1)
Overview:• IC-DISC can own 100% of a Foreign International Sales Corporation (FISC) which has
to be located in a jurisdiction outside of the 50 United States and Puerto Rico (i.e. U.S. Virgin Islands, or Bermuda)
• FISC buys the inventory from the US Exporter at a discount and than sells it to the foreign customers – the FISC earns a standard distributor return
• FISC pays a dividend of profits to the IC-DISCClient Impact:• FISC is more visible to customers than the IC-DISC; customers deal directly with the
FISCBusiness Impact:
• FISC performs back-office invoicing and collections• FISC is a full-fledged foreign trading company with inventory, credit, and market risk• Requires a more extensive IRC Sec. 482 Transfer Pricing Study
Average CTI transfer amount – 75% to 85%
12
“Seeing beyond the numbers…”
Thank You
Jonathan Lysenko(212) 682-1600 ext 6359
13
“The material contained in this presentation is for general information and should not be
acted upon without prior professional consultation.”