Post on 13-Sep-2020
transcript
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. 10.
NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no
longer permitted.
IC-DISC 2.0: Moving Beyond
the Basics to Pricing Commissions and
Structuring Complex Corporate Entities Designing Commission Strategies, Utilizing Trusts, and Setting Up Distributor Companies
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, FEBRUARY 2, 2017
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 and Milwaukee
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
1-866-328-9525 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail sound@straffordpub.com 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 F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
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 and include the final verification code on the
Affirmation of Attendance portion of the form.
For additional information about continuing education, call us at 1-800-926-7926 ext.
35.
FOR LIVE EVENT ONLY
IC-DISCs: Structuring to
Maximize Tax Benefits
Presented by
Robert Misey, Esq.
Chair, International Department
Reinhart Boerner Van Deuren, s.c.
(312) 207-5466; (414) 298-8135
rmisey@reinhartlaw.com
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
5
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
6
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
– If the manufacturing entity is a flow-through entity,
the tax savings are 20 percentage points
– If the manufacturing entity is a C corporation, the
tax savings are 28 percentage points
7
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
The Tests to Qualify as an IC-DISC
• Qualified Export Receipts Test
• Qualified Export Assets Test
8
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
9
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 1
Sales Produce Gross Receipts
10
IC-DISC
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 2 Services Produce Gross Receipts
11
IC-DISC
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 3 Architectural Services Produce
Gross Receipts
12
IC-DISC
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
13
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 4 Working Capital as Qualified Export Assets
14
IC-DISC
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 5 Export Property as Qualified Export Assets
15
IC-DISC
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
16
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
17
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 6
Generally Considered to Constitute
Manufacturing
18
IC-DISC USAco
commission
US
sunglass components
Foreign
U.S.
sunglasses
Exports
US
IC-DISC USAco
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Qualification as Export Property
• The Destination Requirement
– The destination test
requires being held
for use outside the
United States
19
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 7
Satisfying the Destination Test
20
IC-DISC
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 8
No Further U.S. Manufacturing
21
IC-DISC
Big3co
Familyco
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 9
22
P
US
IC-DISC
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
23
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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
24
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 10
4% of the Qualified Export Receipts
25
IC-DISC
US
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Example 11
50% of Combined Taxable Income
26
US
IC-DISC
Any tax advice included in this communication is not intended or written to be used, and it cannot be
used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.
© Forte International Tax, LLC All rights reserved. www.forteintax.com
Calculating IC-DISC Income
Mark C. Gasbarra
Strafford Webinar IC-DISC 2.0
February 2, 2017
29 29
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
30 30
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
Unrelated Supplier?
Calculating Combined Taxable Income
Commission versus Buy-Sell Transactions
Marginal Costing & No Loss Rules
Special topics
Case Study
31 31
IC-DISC History
1971: Domestic International Sales Corporation (DISC) regime
enacted
1984: DISCs are replaced with two separate provisions, Foreign Sales
Corporations (FSCs) and IC-DISCs
2000: FSCs repealed and replaced with Extraterritorial Income (ETI)
2004: ETI phased out and section 199 phased-in
32 32
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.
33 33
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.
34 34
Related Party & Related Supplier
Related Party
– A person which is controlled directly or indirectly by the same interests as
the IC-DISC within the meaning IRC Section 482.
Related Supplier
– A related party which singly engages in a transaction directly the IC-
DISC.
Administrative Pricing Rules
– Only applicable to transactions between an IC-DISC and its related
supplier.
An IC-DISC may have different related suppliers with respect to
different transactions
35 35
Related Supplier Example
X owns all the stock of Y, a regular corporation, and of
Z, an IC- DISC
X sells a product to Y which is resold to Z
Only Y is the only related supplier of Z with respect to
this transaction and eligible for Administrative Pricing
If, however, X sells directly to Z and Y also sells
directly to Z, then, as to the transactions involving
direct sales to Z, each of X and Y is a related supplier
of Z.
36 36
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.
37 37
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)
38 38
Buy/Sell vs. Commission DISC
The same amount of DISC taxable income results under
either approach.
In a buy-sell transaction you first determine DISC
taxable income and then back into the transfer price.
Selection of a Buy/Sell or Commission can be made at
the transaction level.
39 39
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
40 40
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
41 41
Example 1
Example 1 Total Non-Export Export 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
42 42
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
43 43
Example 2
Example 2 Total Non-Export Export 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
44 44
Example 3
Example 3 Total Non-Export Export 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
45 45
Example 4
Example 4 Total Non-Export Export 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
46 46
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
47 47
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
48 48
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.
49 49
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.
50 50
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.
51 51
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)
52 52
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!
53 53
Case Study Data
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
54 54
Basic Calculation
A&A Account Type Summary Report by Export Subject: 1000 IC-DISC
Scenario: Simple IC-DISC Case
Tax Year: 2015
Purpose: U.S. Tax
Date and Time: 1/17/17 18:54
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
55 55
Case Study – Transaction File
56 56 56
56
Case Study – Product Tree
58 58
Optimization Summary
A&A Account Type Summary Report by Export Subject: 1000 IC-DISC
Scenario: Simple DISC Opimization
Tax Year: 2015
Purpose: U.S. Tax
Date and Time: 1/17/17 19:02
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 (784,552) 0 (784,552)
Domestic Production Deduction - System 0 0 0
Taxable Income after ETI and DPAD 2,015,448 1,960,000 55,448
Income Taxes 0 0 0
Withholding Taxes 0 0 0
Net Income 2,015,448 1,960,000 55,448
59 59
Summary of Pricing Methods
Sum By Batch Report Subject: 1000 IC-DISC
Scenario: Simple DISC Opimization
Tax Year: 2015
Purpose: U.S. Tax
Date and Time: 1/17/17 19:05
Pricing Batch Sales Gross Profit CTI Benefit
1 - FC-CTI 3,519,807 2,356,124 1,264,984 632,492
2 - MC-OPP limit 1,674,115 511,254 (7,721) 117,188
4 - MC-CTI 179,683 19,633 (36,070) 9,817
13 - Special No-Loss 626,395 (187,011) (381,193) 25,056
Total 6,000,000 2,700,000 840,000 784,552
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 364,552
60 60
IRS Form 1120-IC-DISC
Schedule K vs. 1099
Schedule B - Gross Receipts
Number of Schedule P’s to support the income
Schedule E – IC-DISC Expenses
– Export Promotion Expenses
10% of Qualified Amount can increase IC-DISC Income
– Entitled to reimbursement of all expenses incurred by the IC-DISC
Schedule J – Complexity
– Deemed Dividends
– Accumulated DISC Income
Schedule L – Balance Sheet
Schedule O – Check Boxes Be Careful
Schedule Q – Producer’s Loans
61 61
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)
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Structuring the IC-DISC
Subsidiary of a Flow-Through
62
IC-DISC
US
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Structuring the IC-DISC
Brother-Sister of a Flow-Through
63
IC-DISC
US
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Structuring the IC-DISC
Brother-Sister of a C Corporation
64
IC-DISC
US
C Corp
The Interest Charge in IC-DISC
U.S. tax – with acc IC-DISC Inc.: $8.5 million
U.S. tax – without acc IC-DISC Inc.: $5 million
Deferred U.S. tax: $3.5 million
AFR: 1%
Interest: $350,000
U.S.
F
US
IC-
DISC
export customers
acc IC-DISC Inc.:
$10 million
Manufacturer
65
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Structuring the IC-DISC Ownership by a Trust
US1 USN
U.S.
Foreign
. . . . . .
IC-DISC
Trust
C Corp
Exports
commission
dividends
beneficiaries
66
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Structuring the IC-DISC Ownership by an LLC
U.S.
Foreign
US1
LLC
IC-DISC
Exports
commission
USN
C Corp
dividends
. . . . .
members
C Corp IC-DISC
US1 USN
LLC
67
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Multiple C Corporations
US
F
US1
US5
. . . .
C Corp
IC-
DISC
C
Blocker
1
C
Blocker
2
C
Blocker
3
export customers
C Corp
68
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Joint Venture: S Corp and Public Co
US
IC-
DISC
S
Corp
US
F
US1 USN . . . .
Public
Co
LLC
export
customers
commission
dividend
69
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Gift Tax Implications?
US
F
US
S
Corp
IC-
DISC
commission
export
customers
dividend
Kid
70
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Non-Family Members
US
F
US
S
Corp
IC-
DISC
export
customers
CMO
dividend
71
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Trust For a Co-Op's Members
US
F
US1
IC-DISC
USN
dividend
. . . . . distributions
Co-Op
Trust
Export
customers
commission
72
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Architects and Engineers
US
F
IC-
DISC
designs for
foreign projects
US
dividend
engineers
architects
73
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Pure Distributor
US
F
IC-
DISC
export customers
US
dividend
unrelated
manufacturer
widgets
74
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Inbound Treaty Benefits
IC-DISC USSub
75
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Use of a Trust With Varying
Ownership Percentages
export customers
US
F
IC-DISC
F S D
S
export customers
90%
5% 5%
33%
33%
33%
Trust
LLC
76
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Subpart F Income Created
US
HKCo
S US
F
PRC Customers
product
77
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
Avoid Subpart F Income With a
Related Foreign Export Corporation
S
widgets
$400
US
IC-
DISC commission
RFEC
other country export
customers
HKCo
same country
foreign customers
widgets
$500
US
F
78
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
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 79
©2017 All Rights Reserved Reinhart Boerner Van Deuren s.c.
About Robert Misey
80
Robert Misey is Chair of the International
Department for Reinhart Boerner Van Deuren
and a member of the bar in California,
Wisconsin, and the District of Columbia.
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.
Robert can be reached at either 312-207-5456
or 414-298-8135 or rmisey@reinhartlaw.com
35409728
81 81
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
mgasbarra@forteintax.com
(847) 733-0645
www.forteintax.com