ic-disc and fdii: u.s. export incentives post-tax...
TRANSCRIPT
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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, JULY 31, 2018
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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Robert Misey4
IC-DISCs: Structuring to Maximize Tax
Benefits
Presented by
Robert Misey, Esq.
Chair, International DepartmentReinhart Boerner Van Deuren, s.c.
(312) 207-5456; (414) 298-8135
© 2018 All Rights Reserved
Robert Misey5
Today's Discussion Topics
• Tax benefits of the IC-DISC
• Tests to qualify as an IC-DISC
• Requirements—manufacturing, destination, content
• Determining and maximizing the IC-DISC benefit
• A multitude of structuring techniques, including
▪ The use of trusts for exporters whose ownership percentage
changes
▪ The use of IC-DISCs to compensate certain employees
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Robert Misey6
Introduction to IC-DISC
• Formation of the IC-DISC
▪ A single class of stock
▪ A minimum par value of $2,500
▪ Elect to be an IC-DISC with a Form 4876-A
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Introduction to IC-DISC (cont.)
• Taxation of an IC-DISC and its shareholders
▪ An IC-DISC is not subject to corporate tax
▪ When the IC-DISC pays a dividend, its owners will pay tax at a
20% rate
▪ The tax savings to the manufacturing entity's owners is
approximately 17 percentage points
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The Tests to Qualify as an IC-DISC
• Qualified Export Receipts Test
• Qualified Export Assets Test
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The Tests to Qualify as an IC-DISC (cont.)
• 95% of its gross receipts must constitute qualified export receipts
▪ Sales of export property
▪ Rents for use of export property outside the
United States
▪ Services related to exports
▪ Engineering or architectural services for construction projects
abroad, and
▪ Commissions
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Example 1
Sales Produce Gross Receipts
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Example 2
Services Produce Gross Receipts
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Example 3
Architectural Services Produce Gross Receipts
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The Tests to Qualify as an IC‐DISC
• 95% of the assets of the IC-DISC must be qualified export assets
▪ Temporary investments
▪ Export property
▪ Accounts receivable
▪ Loans to producers
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Example 4
Working Capital as Qualified Export Assets
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Example 5
Export Property as Qualified Export Assets
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Qualification as Export Property
• The property must be manufactured in the U.S. by a person other
than the IC-DISC
• The export property must be held primarily for use outside the
U.S.
• The property must have a maximum of 50% foreign content
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Qualification as Export Property (cont.)
• Property is manufactured within the U.S. if either
▪ U.S. conversion costs incurred constitute 20% of the cost of
goods sold
▪ There is a substantial transformation in the United States, or
▪ The operations in the U.S. are generally considered to
constitute manufacturing
© 2018 All Rights Reserved
Robert Misey18
Example 6
Generally Considered to Constitute
Manufacturing
IC-DISCUSAco
commission
US
sunglass components
Foreign
U.S.
sunglasses
Exports
US
USAcoIC-DISC
© 2018 All Rights Reserved
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Qualification as Export Property
• The Destination Requirement
▪ The destination test
requires being held
for use outside the
United States
© 2018 All Rights Reserved
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Example 7
Satisfying the Destination Test
IC-DISC
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Example 8
No Further U.S. Manufacturing
IC-DISC
Big3coFamilyco
Familyco
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Example 9
P
US
IC-DISC
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Qualification as Export Property (cont.)
• The Maximum of 50% Foreign Content Requirement
▪ No more than 50% of the fair market value of export property
may be attributable to the fair market value of imported
articles
▪ The fair market value of the foreign content is determined by
its dutiable value
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Determining the IC-DISC Benefit
• The commission is the greater of
▪ 4% of the qualified export receipts
▪ 50% of the combined taxable income, or
▪ The arm's-length amount determined under the transfer pricing
principles of Section 482
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Robert Misey25
Example 10
4% of the Qualified Export Receipts
IC-DISC
US
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Example 11
50% of Combined Taxable Income
US
IC-DISC
2828
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
2929
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
3030
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.
3131
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.
3232
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.
3333
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)
3434
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
3535
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
3636
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
3737
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
3838
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
3939
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
4040
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
4141
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
4242
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
4343
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.
4444
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.
4545
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.
4646
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)
4747
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!
4848
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
4949
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
5050
Case Study – Transaction File
515151
51
Case Study –Product Tree
5252
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
5353
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
5454
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
5555
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
5656
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
5757
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)
5858
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
(847) 733-0645
www.forteintax.com
© 2018 All Rights Reserved
Robert Misey60
37.5% Deduction for FDII of a C Corporation Only
(non-routine return taxed at 13.125%)
USCo
FSubunrelated
related
U.S.
F
$10M QBAI Quarterly Average
$2M Tested Inc (w/o GILTI) (w/o S-F)
$500,000 f sales inc (related & unrelated)
37.5% of Foreign-Derived Intangible Income
37.5% of Deemed Intangible Income X Foreign-Derived Deduction Eligible Income
Deduction Eligible Income37.5% of (Tested Inc w/o GILTI w/o S-F – 10% of U.S. QBAI) X F sales inc + F Services Inc
Tested Inc w/o GILTI & w/o S-F37.5% of ($2M – 10% of $10M) X $500,000
$2M$93,750 deduction
Effective rate of 13.125% on exports or foreign services of a C corporation
beyond a routine 10% return on assets
© 2018 All Rights Reserved
Robert Misey61
Structuring the IC-DISC
Subsidiary of a Flow-Through
IC-DISC
US
© 2018 All Rights Reserved
Robert Misey62
Structuring the IC-DISC
Brother-Sister of a Flow-Through
IC-DISC
US
© 2018 All Rights Reserved
Robert Misey63
Structuring the IC-DISC
Brother-Sister of a C Corporation
IC-DISC
US
C Corp
© 2018 All Rights Reserved
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The Interest Charge in IC-DISC
U.S. tax with acc IC-DISC Inc.: $7.6 million
U.S. tax without acc IC-DISC Inc.: $5 million
Deferred U.S. tax: $2.1 million
AFR: 1%
Interest: $21,000
IC-DISCacc IC-DISC Inc.:
$10 million
U.S.
F
US
Manufacturer
export customers
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Robert Misey65
Structuring the IC-DISC
Ownership by a Trust
Exports
US1 USN
U.S.
Foreign
. . . . . .
IC-DISC
Trust
C Corpcommission
dividends
beneficiaries
© 2018 All Rights Reserved
Robert Misey66
Structuring the IC-DISC
Ownership by an LLC
U.S.
Foreign
Exports
commission
dividends
. . . . .
members
C Corp IC-DISC
US1 USN
LLC
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Robert Misey67
Joint Venture: S Corp and Public Co
S
CorpPublic Co
US
US
F
US1 USN. . . .
LLC
export
customers
commission
dividend
IC-DISC
S
Corp
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Robert Misey68
Gift Tax Implications?
US
F
US
S
CorpIC-DISC
commission
export
customers
dividend
Kid
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Robert Misey69
Non-Family Members
US
F
US
S
CorpIC-DISC
export
customers
CMO
dividend
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Robert Misey70
Trust For a Co-Op's Members
US
F
US1
IC-DISC
USN
dividend
. . . . . distributions
Co-Op
Trust
Export
customers
commission
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Robert Misey71
Architects and Engineers
US
F
IC-DISC
designs for
foreign projects
US
dividend
engineers
architects
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Robert Misey72
Pure Distributor
US
F
IC-DISC
export customers
US
dividend
unrelated
manufacturer
widgets
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Robert Misey73
Inbound Treaty Benefits
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Robert Misey74
Use of a Trust With Varying Ownership
Percentages
export customers
US
F
IC-DISC
F S D
S
export customers
90% 5%33%
33%
33%
TrustLLC
5%
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Robert Misey75
Ownership by a Roth IRA
US
USAco IC-DISC
U.S.
Foreign
Roth
IRA
commission
dividends
Exports
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Robert Misey76
Subpart F Income or GILTI Created
US
HKCo
SUS
F
PRC Customers
product
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Robert Misey77
Avoid Subpart F Income With a
Related Foreign Export Corporation
US
IC-DISCcommission
RFEC
other country
export customers
HKCo
same country
foreign customers
widgets
$500
US
F
S
widgets
$400
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Robert Misey78
Classic IC-DISC and Section 199A
Total Tax with 37% Rate
$500g @ 37% =$185g
$500g @ 20% =$100g
$285g
w/o IC-DISC: $370g
Total Tax with 29.6% Rate
$500g @ 29.6% = $148g
$500g @ 20% = $100g
$248g
w/o IC-DISC: $296g
• The Domestic Production Deduction Didn't Survive
Export Customers
US
IC-DISC
U.S.
F
$500g
commission
$1M export inc
$500g commission
500g incSCorp
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Robert Misey79
Super-Charged IC-DISC Combines an IC-DISC with a C Corporation's
Foreign-Derived Intangible Income
Total Tax
C Corp Tax: $66g
Indiv Inc Tax: $87g
Qualified Div Tax: $100g
$253g
Qualified Div Tax
$500g @ 20%
$100g
Qualified Div Tax
$434g @ 20%
$87g
$1M export inc
($500g commission)
$500g inc
C Corp tax
$500g @ 13.125%
$66g
E&P
$500g-$66g
$434g
Export
Customers
US
C Corp IC-DISC$500g
commission
$434g div
U.S.
F
S Corp
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Robert Misey80
Implementation Considerations
for the IC-DISC
• Incorporate the IC-DISC before the export
sales begin
• Analyze the export sales
• Draft the commission agreement
• Prepare and timely file the Form 4876-A that elects
IC-DISC status
• Prepare a manual that contains guidelines and a
checklist/calendar
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Robert Misey81
About Rob Misey
Robert Misey is Chair of the International
Department for Reinhart Boerner Van Deuren
and a Chair of the International Tax Committee for
the American Bar Association.
A graduate of the law schools at Vanderbilt
University and Georgetown University, he is a former trial attorney
for the Internal Revenue Service Chief Counsel (International) in
Washington, DC. He is also the author of the books A Practical Guide
to U.S. Taxation of International Transactions and Federal Taxation:
Practice and Procedure.
Rob can be reached at either 312-207-5456
or 414-298-8135 or [email protected]