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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

[email protected]

mailto:[email protected]


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


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


Robert Misey7

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


Robert Misey8

The Tests to Qualify as an IC-DISC

• Qualified Export Receipts Test

• Qualified Export Assets Test


Robert Misey9

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


Robert Misey10

Example 1

Sales Produce Gross Receipts


Robert Misey11

Example 2

Services Produce Gross Receipts


Robert Misey12

Example 3

Architectural Services Produce Gross Receipts


Robert Misey13

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


Robert Misey14

Example 4

Working Capital as Qualified Export Assets


Robert Misey15

Example 5

Export Property as Qualified Export Assets


Robert Misey16

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


Robert Misey17

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


Robert Misey18

Example 6

Generally Considered to Constitute

Manufacturing

IC-DISCUSAco

commission

US

sunglass components

Foreign

U.S.

sunglasses

Exports

US

USAcoIC-DISC


Robert Misey19

Qualification as Export Property

• The Destination Requirement

▪ The destination test

requires being held

for use outside the

United States


Robert Misey20

Example 7

Satisfying the Destination Test

IC-DISC


Robert Misey21

Example 8

No Further U.S. Manufacturing

IC-DISC

Big3coFamilyco

Familyco


Robert Misey22

Example 9

P

US

IC-DISC


Robert Misey23

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


Robert Misey24

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


Robert Misey25

Example 10

4% of the Qualified Export Receipts

IC-DISC

US


Robert Misey26

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



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



IC-DISC Income

- 4% x QER 4.00 4.00 8.00


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


Expenses 120 80 8 32 40



IC-DISC Income

- 4% x QER 4.00 4.00 8.00


- 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


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



Sales 400 200 100 100 200

COGS 250 100 90 60 150


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


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


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


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


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


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


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)


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


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


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)


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

[email protected]

(847) 733-0645

www.forteintax.com


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


Robert Misey61

Structuring the IC-DISC

Subsidiary of a Flow-Through

IC-DISC

US


Robert Misey62


Brother-Sister of a Flow-Through

IC-DISC

US


Robert Misey63


Brother-Sister of a C Corporation

IC-DISC

US

C Corp


Robert Misey64

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


Robert Misey65


Ownership by a Trust

Exports

US1 USN

U.S.

Foreign

. . . . . .

IC-DISC

Trust

C Corpcommission

dividends

beneficiaries


Robert Misey66


Ownership by an LLC

U.S.

Foreign

Exports

commission

dividends

. . . . .

members

C Corp IC-DISC

US1 USN

LLC


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


Robert Misey68

Gift Tax Implications?

US

F

US

S

CorpIC-DISC

commission

export

customers

dividend

Kid


Robert Misey69

Non-Family Members

US

F

US

S

CorpIC-DISC

export

customers

CMO

dividend


Robert Misey70

Trust For a Co-Op's Members

US

F

US1

IC-DISC

USN

dividend

. . . . . distributions

Co-Op

Trust

Export

customers

commission


Robert Misey71

Architects and Engineers

US

F

IC-DISC

designs for

foreign projects

US

dividend

engineers

architects


Robert Misey72

Pure Distributor

US

F

IC-DISC

export customers

US

dividend

unrelated

manufacturer

widgets


Robert Misey73

Inbound Treaty Benefits


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%


Robert Misey75

Ownership by a Roth IRA

US

USAco IC-DISC

U.S.

Foreign

Roth

IRA

commission

dividends

Exports


Robert Misey76

Subpart F Income or GILTI Created

US

HKCo

SUS

F

PRC Customers

product


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


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


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


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


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]

Documents

IC-DISC and FDII: U.S. Export Incentives Post-Tax …media.straffordpub.com/products/ic-disc-and-fdii-u-s...2018/07/31 · Service areas include the full range of international tax