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

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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

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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

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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

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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– 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

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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

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Select Best Pricing Method Example

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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


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%

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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%

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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-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%

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Thank You

Jonathan Lysenko(212) 682-1600 ext 6359

[email protected]

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“The material contained in this presentation is for general information and should not be

acted upon without prior professional consultation.”

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