Increasing ICDISC Revenue Maximize the Export Tax Incentive

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Increasing IC-DISC Revenue Maximize the Export
Tax Incentive

• Jonathan Lysenko
• May 20, 2009

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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 clients
  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 RS 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
• 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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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-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

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Thank You

• Jonathan Lysenko
• [phone] ext 6359
• lysenko_at_amper.com