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:
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•
•
•
“Seeing beyond
the numbers…”
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
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Safe Harbor Commission IC-DISC
IRC 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
“Seeing beyond
the numbers…”
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Increase the IC-DISC Benefit
Maximize Export Gross Receipts:
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•
Related & Subsidiary Services
Export Promotion Expenses
Select Best Pricing Method:
•
•
Transaction by Transaction Pricing
Marginal Costing
Add Functions & Risks:
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•
•
“Seeing beyond
the numbers…”
Buy / Sell IC-DISC
Factoring Export Receivables
Foreign International Sales Corporation
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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
“Seeing beyond
the numbers…”
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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
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–
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“Seeing beyond
the numbers…”
Advertising
General and administrative expenses
Freight and shipping
Packaging, designing and labeling, etc.
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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
“Seeing beyond
the numbers…”
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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
“Seeing beyond
the numbers…”
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Select Best Pricing Method
Example
Sales
COGS
Gross Profit
Deductions
TI (Full-Cost CTI)
925
560
365
185
180
200
50
150
100
50
100
60
40
45
(5)
300
250
50
40
10
325
200
125
125
OPP
19%
25%
-5%
3%
38%
4% Gross Receipts
50% FC-CTI (30 if TxT))
24
28
8
25
4
(3)
12
5
Best Method
41
25
4
12
150
39
40
19
50
58
19
10
25
25
10
25
Marginal Costing
- MC-CTI
- OPPL
MC-Method
Now Best Method
“Seeing beyond
the numbers…”
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Buy/Sell IC-DISC
IRC 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%
“Seeing beyond
the numbers…”
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Export Invoice Factoring
Rev. 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%
“Seeing beyond
the numbers…”
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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-DISC
Client Impact:
• FISC is more visible to customers than the IC-DISC; customers deal directly with the
FISC
Business 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%
“Seeing beyond
the numbers…”
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Thank You
Jonathan Lysenko
(212) 682-1600 ext 6359
lysenko@amper.com
“The material contained in this presentation is
for general information and should not be
acted upon without prior professional
consultation.”
“Seeing beyond
the numbers…”
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