ic-disc and fdii: u.s. export incentives post-tax...

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The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. NOTE: If you are seeking CPE credit , you must listen via your computer — phone listening is no longer permitted. IC-DISC and FDII: U.S. Export Incentives Post-Tax Reform, Pricing Commissions, and Structuring Corporate Entities Maximizing Tax Savings, Pass-Through Entities vs. C Corporations, Distributor Companies, and Alternative Ownership Structures Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, SEPTEMBER 24, 2019 Presenting a live 90-minute webinar with interactive Q&A Mark C. Gasbarra, CPA, National Managing Director, Forte International Tax, Evanston, Ill. Robert J. Misey, Jr., Shareholder, Reinhart Boerner Van Deuren, Chicago & Milwaukee

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Page 1: IC-DISC and FDII: U.S. Export Incentives Post-Tax …media.straffordpub.com/products/ic-disc-and-fdii-u-s...2019/09/24  · IC-DISC and FDII: U.S. Export Incentives Post-Tax Reform,

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no

longer permitted.

IC-DISC and FDII: U.S. Export Incentives Post-Tax Reform, Pricing Commissions, and Structuring Corporate EntitiesMaximizing Tax Savings, Pass-Through Entities vs. C Corporations, Distributor Companies, and Alternative Ownership Structures

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, SEPTEMBER 24, 2019

Presenting a live 90-minute webinar with interactive Q&A

Mark C. Gasbarra, CPA, National Managing Director, Forte International Tax, Evanston, Ill.

Robert J. Misey, Jr., Shareholder, Reinhart Boerner Van Deuren, Chicago & Milwaukee

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Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-877-447-0294 and enter your Conference ID and PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can address the

problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

NOTE: If you are seeking CPE credit, you must listen via your computer — phone

listening is no longer permitted.

Viewing Quality

To maximize your screen, press the ‘Full Screen’ symbol located on the bottom right of the

slides. To exit full screen, press the Esc button.

FOR LIVE EVENT ONLY

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Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email that you

will receive immediately following the program.

For CPE credits, attendees must participate until the end of the Q&A session and

respond to five prompts during the program plus a single verification code. In addition,

you must confirm your participation by completing and submitting an Attendance

Affirmation/Evaluation after the webinar.

For additional information about continuing education, call us at 1-800-926-7926 ext. 2.

FOR LIVE EVENT ONLY

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Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the link to the PDF of the slides for today’s program, which is located

to the right of the slides, just above the Q&A box.

• The PDF will open a separate tab/window. Print the slides by clicking on the

printer icon.

FOR LIVE EVENT ONLY

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Speaker Introduction

Mark Gasbarra, CPA

National Managing Director

Forte International Tax, LLC

▪ Firm’s focus is delivering processes and tools, including

VantagePoint™, to help international businesses

minimize their global tax cost

▪ Service areas include the full range of international tax

services including structuring, transfer pricing, foreign

tax credit utilization and U.S. manufacturing and export

tax incentives (“IC-DISC”)

▪ Mark has worked with DISC’s since 1981 and has led

the export incentives practices of two of the Big-Four

accounting firms before forming Forte International Tax

Services in 2004

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Topics of this Session

▪ Maximizing IC-DISC Taxable Income

▪ Related Supplier Methods

▪ Administrative Pricing Rules

▪ 4% Gross Receipts

▪ 50% Combined Taxable Income

▪ Arms Length Pricing -§482

▪ Calculating Combined Taxable Income

▪ Commission versus Buy-Sell Transactions

▪ Marginal Costing & No Loss Rules

▪ Foreign Derived Intangible Income (“FDII”)

▪ Case Study

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Why Do We Care?

▪ Bottom Line – Tax Savings!

▪ Qualified DISC income is exempt from Federal income tax and

may be excluded from State income tax as well.

▪ An IC-DISC is a domestic corporation so its dividends to qualified

shareholders are taxed at capital gains rates.

▪ Goal: Maximize the DISC’s income and minimize the ordinary

taxable income of its related supplier.

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DISC Income Options

▪ Administrative pricing methods

– Available to allocate profits between a Related Supplier and an IC-DISC.

– This is the most common and will be the focus of our discussion.

▪ Arm’s length profit calculation determined under IRC Section 482

– Applicable to transactions between related parties that are controlled by

the same interests.

▪ Fully operational exporter of U.S. produced property entity

– Any supplier will do.

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3030

Administrative Pricing Methods

▪ 4% Gross Receipts Method(s)

– Regular no-loss rule

– Special no-loss rule

▪ 50% Combined Taxable Income Method(s)

– Full Costing Combined Taxable Income (“FC-CTI”)

– Marginal Costing Combined Taxable Income (“MC-CTI”)

▪ MC-CTI only considers direct costs (think about gross profit)

▪ Limited to the overall profitability

▪ Note that combined taxable income must always be determined.

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What is “CTI” Anyway?

▪ CTI is the limiting factor in determining DISC taxable income.

▪ CTI is the combined taxable income of an IC-DISC and its

Related Supplier with respect to each qualified export

transaction.

▪ In order to maximize the IC-DISC tax exempt income you first

maximize CTI.

▪ In order to maximize CTI we must fully understand its

components.

– Qualified Export Receipts

– Directly Allocable Costs – with adherence to the Related Supplier’s

method of accounting

– Allocation and Apportionment of Deductions (Reg. 861-8)

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How to Maximize CTI

▪ Qualified export gross receipts are maximized by making sure to

pick up all available sources, including:

– Direct and Indirect Exports

– Component Sale

– Other components of gross receipts (broadly defined)

▪ Cost of Goods Sold – must be consistent with the Related Supplier

method of accounting

▪ Deductions – Section 861-8 allocation and apportionment

– Interest Expense - Assets

– Research & Development – Sales or Gross Income (5-year election)

– Other – considerable leeway here, based on a factual relationship

between the deduction and class of gross income

– Consistency among all operative sections of the IRC

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What About TxT and Optimization?

▪ The DISC regulations generally require the computation of

DISC taxable income individually for each export transaction

▪ However grouping in accordance with industry trade or practice

is allowed (but generally not beneficial)

– Grouping for pricing; and or

– Grouping for Overall Profit Percentage

▪ Best approach is a T x T pricing approach coupled with

Optimization by testing all available pricing and grouping

alternatives in addition to available allocation and apportionment

method using sophisticated software tools – this can make a big

difference where there is significant variability among the

various export transactions

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3434

Example 1

Example 1 Total Non-ExportExport Trans 1

Export Trans 2 Grouped

Sales 400 200 100 100 200

COGS 250 100 90 60 150

Gross Profit 150 100 10 40 50

Expenses 120 80 8 32 40

Taxable Income 30 20 2 8 10

Profit Percentage 7.50% 10.00% 2.00% 8.00% 5%

IC-DISC Income

- 4% x QER 4.00 4.00 8.00

- Regular No-Loss Rule 2.00 8.00 10.00

Net 4% Method 2.00 4.00 8.00

- 50% x FC-CTI 1.00 4.00 5.00

Best Result 2.00 4.00 8.00

Observations Application of the regular no-loss rule

Grouping is beneficial in this case

All expenses are apportioned on a gross income basis

Export transaction #2 - Export profit of 8% results are same

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3535

What is Marginal Costing

▪ It is a subset of the 50% combined taxable income method

▪ Only considers direct costs (no 861-8 burden)

▪ But, limited to the Overall Profit Percentage (“OPP”) multiplied

the qualified export receipts

▪ The OPP is the taxable income (both domestic and export)

divided by all sales (both domestic and export)

– TI/Sales = OPP

▪ Marginal Costing is always an option but only on Sales

Transactions

▪ You are deemed to be discounting your exports sales in order to

penetrate foreign markets

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3636

Example 2

Example 2 Total Non-ExportExport Trans 1

Export Trans 2 Grouped

Sales 400 200 100 100 200

COGS 250 100 90 60 150

Gross Profit (MC-CTI) 150 100 10 40 50

Expenses 120 80 8 32 40

Taxable Income 30 20 2 8 10

Profit Percentage 7.50% 10.00% 2.00% 8.00% 5%

IC-DISC Income

- 4% x QER 4.00 4.00 8.00

- Regular No-Loss Rule 2.00 8.00 10.00

Net 4% Method 2.00 4.00 8.00

- 50% x FC-CTI 1.00 4.00 5.00

- 50% x MC-CTI 5.00 20.00 25.00

- OPP Limitation 3.75 3.75 7.50

Net 50% MC Method 3.75 3.75 7.50

Best Result 3.75 4.00 8.00

Observations Marginal Costing boosts Export Trans 1 up to the OPP limit

Grouping is still beneficial

All expenses are apportioned on a gross income basis

No help from marginal costing on Export Trans #2

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Example 3

Example 3 Total Non-ExportExport Trans 1 Export Trans 2 Grouped

Sales 400 200 100 100 200

COGS 250 100 90 60 150

Gross Profit (MC-CTI) 150 100 10 40 50

Expenses 120 80 8 32 40

Taxable Income 30 20 2 8 10

Profit Percentage 7.50% 10.00% 2.00% 8.00% 5%

IC-DISC Income

- 4% x QER 4.00 4.00 8.00

- Regular No-Loss Rule 2.00 8.00 10.00

- Special No-Loss Rule 7.50 7.50 15.00

Net 4% Method 4.00 4.00 8.00

- 50% x FC-CTI 1.00 4.00 5.00

- 50% x MC-CTI 5.00 20.00 25.00

- OPP Limitation 3.75 3.75 7.50

Net 50% MC Method 3.75 3.75 7.50

Best Result 4.00 4.00 8.00

Observations Marginal Costing boosts Export Trans 1 up to the OPP limit

Application of the Special No-Loss Rule allows full 4% on Trans 1 > 100% CTI

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Example 4

Example 4 Total Non-ExportExport Trans 1

Export Trans 2 Grouped

Sales 400 200 100 100 200

COGS 250 100 90 60 150

Gross Profit (MC-CTI) 150 100 10 40 50

Expenses 120 60 30 30 60

Taxable Income 30 40 -20 10 -10

Profit Percentage 7.50% 20.00% -20.00% 10.00% -5%

IC-DISC Income

- 4% x QER 4.00 4.00 8.00

- Regular No-Loss Rule -20.00 10.00 -10.00

- Special No-Loss Rule 7.50 7.50 15.00

Net 4% Method 4.00 4.00 8.00

- 50% x FC-CTI -10.00 5.00 -5.00

- 50% x MC-CTI 5.00 20.00 25.00

- OPP Limitation 3.75 3.75 7.50

Net 50% MC Method 3.75 3.75 7.50

Best Result 4.00 5.00 8.00

Observations Now expenses are apportioned on relative Sales

Sales base increases the variability of profit

Now T x T = 9 which is and increase of 12.5% over grouping

The loss for Export Trans 1 is inconsequential

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Key 861-8 Definitions

• Factual Relationships – between deductions and the “class of gross”

income to which they relate

• Allocation – normally a definite relationship will exist, in which case a

deduction is allocated to one or more classes of gross income

• Classes of Gross Income – not pre-defined but would include items

listed in IRC §61, including income derived from business, interest,

rents, royalties, dividends

• Apportionment – the process of spreading a deduction between the

statutory and residual groupings within a class

• Statutory Grouping – defined with respect to an operative section of

the IRC

• Residual Grouping – everything except the statutory grouping

• Operative Section – taxable income from a particular source, e.g.

qualified production activity income for DPAD

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R&E Example (GI vs. Sales)

• Geographic Exclusive apportionment percentage

– N/A for DPAD

– GI Method is 25% vs. 50% for Sales Method

• Sales method focuses on 3-digit SIC Codes

– Product orientation may favor FTC

– Inclusion of controlled sales (CFC’s) – favors DPAD

– Inclusion on non-controlled sales (royalty payors) –

favors DPAD

• Numeric Example

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Interest Expense

• Under IRC §864(e) and Treas. Reg. §1.861-9T

– Affiliated groups: allocate and apportion interest expense of each

member as if all members of such group were a single corporation.

• Foreign corporation treated as a member of affiliated group if:

– more than 50 percent of the gross income is effectively connected with the

conduct of a trade or business within the United States, and

– at least 80 percent of either the vote or value of all outstanding stock is

owned directly or indirectly by members of the affiliated group.

– Asset method must be used. May elect to determine the value of its

assets on the basis of either the:

• tax book value method.

• the alternative tax book value method, or

• the fair market value method.

– Tax-exempt assets not taken into account.

– Basis of stock in nonaffiliated 10-percent owned corporations

adjusted for earnings and profits changes.

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Other Prescribed Relationships

• §1-861-8(e) Allocation and apportionment of

certain deductions.– Stewardship and controlled services.

– Legal and accounting fees.

– Income Taxes.

– Losses on the sale, exchange, or other disposition of property.

– Net operating loss deduction.

– Deductions which are not definitely related.

– Special deductions.

– Personal exemptions.

– Deductions for certain charitable contributions.

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Supportive Deductions

• Under IRC §861-8T(B)(3)– Deduction may relate to other deductions, which can be more

readily allocated to gross income.

– Deductions may be allocated to all gross income or another broad

class of gross income and apportioned within that class using any

reasonable apportionment base.

– Deductions not definitely related to any class of gross income,

allocated and apportioned to all classes on a relative gross income

basis.

– §864(e)(6) and §1.861-14T require affiliated group apportionment

base, unless less than all members of affiliated group have gross

income in that class, in which case the base can include only the

members that have income in that class as part of the base.

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4444

Optimization Levers

▪ Allocation and Apportionment

– Other than the prescribed methods for specific deductions, such as interest

and R&D, any method that is reasonable should be accepted.

– For example, sales, gross receipts, gross income, gross profit, cost of

goods sold, time spent, square footage, etc.

▪ Pricing methods

– 4% gross receipts limited by either the regular or special no-loss rule

– 50% full cost or marginal cost limited by marginal cost combined taxable

income or the overall profit percentage limitation (OPP x QER)

▪ Grouping alternatives

– Grouping for pricing and grouping for OPP

▪ OPP Grouping

– May be broader than the pricing level (transaction or group)

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4545

Implementation Requirements

▪ Key Data Elements

▪ Legal Structure and Qualification Criteria

▪ Product Hierarchy

▪ Sales and COGS at the lowest level of detail available

▪ This is referred to as transactional data

▪ Variances and Schedule M’s can be apportioned

▪ T x T benefits are driven by variability in profitability

▪ Financial statements

▪ Pro-forma income tax returns

▪ Allocation and Apportionment of Deductions (“A&A”)

▪ A&A Can enhance existing variability

▪ T x T, Marginal Costing, Special No-loss rule all work together to

significantly boost DISC income!

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Case Study DataVantagePoint: Client Provided Information

Account Description Total Non-Export Export

Sales 20,000,000 14,000,000 6,000,000

Returns & Allowances 0

Net Sales 20,000,000

Cost of Sales (11,000,000)

Gross Profit 9,000,000

Computed Inclusions and Gross Up:

Total Income 9,000,000

Interest (500,000)

R&D Expense (700,000)

Other Deductions (5,000,000)

Total Deduction (6,200,000)

Taxable Income before ETI and DPAD 2,800,000

Production Assets 1,000,000

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Basic CalculationVantagePoint: A&A Account Type Summary Report by Export

Account Description Total Non-Export Export

Sales 20,000,000 14,000,000 6,000,000

Returns & Allowances 0 0 0

Net Sales 20,000,000 14,000,000 6,000,000

Cost of Sales (11,000,000) (7,700,000) (3,300,000)

Gross Profit 9,000,000 6,300,000 2,700,000

Computed Inclusions and Gross Up:

Total Income 9,000,000 6,300,000 2,700,000

Interest (500,000) (350,000) (150,000)

R&D Expense (700,000) (490,000) (210,000)

Other Deductions (5,000,000) (3,500,000) (1,500,000)

Total Deduction (6,200,000) (4,340,000) (1,860,000)

Taxable Income before ETI and DPAD 2,800,000 1,960,000 840,000

Export Incentive Deduction - System (420,000) 0 (420,000)

Domestic Production Deduction - System 0 0 0

Taxable Income after ETI and DPAD 2,380,000 1,960,000 420,000

Income Taxes 0 0 0

Withholding Taxes 0 0 0

Net Income 2,380,000 1,960,000 420,000

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Case Study – Transaction File

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49

Case Study –Product Tree

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Optimization SummaryVantagePoint: A&A Account Type Summary Report by Export

Account Description Total Non-Export Export

Sales 20,000,000 14,000,000 6,000,000

Returns & Allowances 0 0 0

Net Sales 20,000,000 14,000,000 6,000,000

Cost of Sales (11,000,000) (7,700,000) (3,300,000)

Gross Profit 9,000,000 6,300,000 2,700,000

Computed Inclusions and Gross Up:

Total Income 9,000,000 6,300,000 2,700,000

Interest (500,000) (350,000) (150,000)

R&D Expense (700,000) (490,000) (210,000)

Other Deductions (5,000,000) (3,500,000) (1,500,000)

Total Deduction (6,200,000) (4,340,000) (1,860,000)

Taxable Income before IC-DISC 2,800,000 1,960,000 840,000

Export Incentive Deduction - System (784,554) 0 (784,554)

Taxable Income 2,015,446 1,960,000 55,446

Net Income 2,015,446 1,960,000 55,446

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DISC Pricing Methods AppliedVantagePoint: Sum by Batch Report

Pricing Batch Sales Gross Profit CTI Benefit

1 - FC-CTI 3,519,807 2,356,126 1,264,986 632,493

2 - MC-OPP limit 1,674,115 511,249 (7,726) 117,188

4 - MC-CTI 179,683 19,634 (36,069) 9,817

13 - Special No-Loss 626,395 (187,009) (381,191) 25,056

Total 6,000,000 2,700,000 840,000 784,554

Optimization Benefit:

Gross Receipts

Method 6,000,000 2,700,000 840,000 240,000

Full Cost CTI Method 840,000 420,000

Best Method without Optimization 420,000

Increase in Benefit from

Optimization 364,554

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FDII IC-DISC OverlapVantagePoint: A&A Account Type Summary Report by DEI

Account Description Total

Foreign

Derived DEI Domestic DEI

Sales 20,000,000 6,000,000 14,000,000

Returns & Allowances 0 0 0

Net Sales 20,000,000 6,000,000 14,000,000

Cost of Sales (11,000,000) (3,300,000) (7,700,000)

Gross Profit 9,000,000 2,700,000 6,300,000

Computed Inclusions and Gross Up:

Total Income 9,000,000 2,700,000 6,300,000

Interest (500,000) (150,000) (350,000)

R&D Expense (700,000) (210,000) (490,000)

Other Deductions (5,000,000) (1,500,000) (3,500,000)

Total Deduction (6,200,000) (1,860,000) (4,340,000)

Taxable Income before FDII 2,800,000 840,000 1,960,000

Taxable Income 2,800,000 840,000 1,960,000

Net Income 2,800,000 840,000 1,960,000

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Foreign Derived Intangible IncomeVantagePoint: FDII Summary Report

U.S. Corporation

Name

a) Foreign Derived

Deduction Eligible

Income

b) Domestic

Deduction Eligible

Income d) Total Income

e) Deduction

Eligible Income

(a + b)

1000 Related

Supplier 840,000 1,960,000 2,800,000 2,800,000

840,000 1,960,000 2,800,000 2,800,000

f) QBAI

g) Deemed Tangible

Income (10% of QBAI)

h) Deemed

Intangible Income

(e - g) i) FDII (a / e * h)

1,000,000 100,000 2,700,000 810,000

1,000,000

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FDII DeductionVantagePoint: GILTI FDII Deduction

Description Amount

Foreign Derived Intangible Income:

1000 Related Supplier 810,000

Total FDII 810,000

FDII Amount after Reduction 810,000

Reduced GILTI and FDII Amount 810,000

Apply Deduction Rates:

FDII Deduction Rate% 37.50%

FDII Deduction 303,750

GILTI and FDII Deduction 303,750

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FDII + IC-DISC CombinedVantagePoint: A&A Account Type Summary Report by DEI

Account Description Total

Foreign

Derived DEI

Domestic

DEI

Sales 20,000,000 6,000,000 14,000,000

Returns & Allowances 0 0 0

Net Sales 20,000,000 6,000,000 14,000,000

Cost of Sales (11,000,000) (3,300,000) (7,700,000)

Gross Profit 9,000,000 2,700,000 6,300,000

Computed Inclusions and Gross Up:

Total Income 9,000,000 2,700,000 6,300,000

Interest (500,000) (150,000) (350,000)

R&D Expense (700,000) (210,000) (490,000)

FDII Deduction (303,750) (303,750) 0

Other Deductions (5,000,000) (1,500,000) (3,500,000)

Total Deduction (6,503,750) (2,163,750) (4,340,000)

Taxable Income before IC-DISC 2,496,250 536,250 1,960,000

Export Incentive Deduction - System (682,876) (682,876) 0

Taxable Income 1,813,374 (146,626) 1,960,000

Net Income 1,813,374 (146,626) 1,960,000

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Optimization Levers

▪ Allocation and Apportionment

– Other than the prescribed methods for specific deductions, such as interest

and R&D, any method that is reasonable should be accepted.

– For example, sales, gross receipts, gross income, gross profit, cost of

goods sold, time spent, square footage, etc.

▪ Pricing methods

– 4% gross receipts limited by either the regular or special no-loss rule

– 50% full cost or marginal cost limited by marginal cost combined taxable

income or the overall profit percentage limitation (OPP x QER)

▪ Grouping alternatives

– Grouping for pricing and grouping for OPP

▪ OPP Grouping

– May be broader than the pricing level (transaction or group)

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Questions and Contact Information

For additional questions on topics related to this discussion, please

contact:

Mark Gasbarra, CPA

National Managing Director

Forte International Tax, LLC

[email protected]

(847) 733-0645

www.forteintax.com

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