IC-DISC - Gallina

Report
Reduce Your Income Tax Rate
on Export Sales and Other
International Tax Issues
GALLINA LLP
 Largest accounting firm (most CPAs) in the
Sacramento region
 One of the10 largest accounting firms in the
State of California and a top 100 firm nationally
and growing
 Full service
 Several teams of specific industry specialists
 2014 Corporate Citizen of the Year recipient
from the Boy Scouts of America, Golden Empire
Council
Today’s Topics
 IC-DISC (Interest Charge – Domestic
International Sales Corporation)
 Transfer Pricing Regulations on Sales to
Foreign Subsidiaries
 Foreign Bank Account and Financial
Account Reporting (“FBAR”)
IC-DISC
Jesse Wutkee
Senior Manager
GALLINA LLP
Email: [email protected]
Phone: (916) 784-7800
www.gallina.com
IC-DISC
Interest Charge-Domestic International Sales Corporation
Background & Overview of IC-DISC
 Last surviving export incentive available for U.S. manufacturers
and distributors.
 IC-DISC statutes were introduced by Congress in 1971 and
further amended in 1984.
 Jobs and Growth Tax Relief Reconciliation Act of 2003
–
–
–
–
2003 Act established “Qualified Dividends”
Qualified Dividends taxed at 15% as opposed to 35%
Dividends paid by IC-DISC qualify as Qualified Dividends
Paid by domestic entity
• Holding period is met
– 60 days within 120 day period test
 IC-DISC made permanent 2013.
What is an IC-DISC?
 An IC-DISC is a C Corporation that elects to be an ICDISC, which is a non-taxable entity for federal tax
purposes and some states (not including California).
– Election must be made within 90 days of incorporation on
Form 4879-A.
 This C Corporation acts as a commission agent for the
related domestic exporter/supplier.
 The commission is paid by the related supplier to the ICDISC and is calculated using the inter-company pricing
rules set forth by the Internal Revenue Code and
Treasury Regulations.
What is the Benefit of an IC-DISC?
 The commission paid to the IC-DISC by the related supplier is an
ordinary dividend, which results in a 40.5% tax savings to the related
supplier.
– 40.5% tax rate is the highest rate, subject to new 3.8% net investment tax
and additional 0.9% Medicare tax on earned income.
 The IC-DISC pays a Qualified Dividend to its shareholders that is taxed
at 23.8%.
 The next result is a 16.7% tax savings.
 Generally, the commission paid to the IC-DISC and the dividend paid to
the IC-DISC shareholders are the same, not withstanding state income
taxes.
IC-DISC
Shareholder Owned
(C or S Corporation)
Shareholder
U.S. Export
Corporation
Export sales
Customer
Commission Payment
IC-DISC
Services
IC-DISC
S-Corporation
Owned
Shareholder
U.S. Export
Corporation
Export sales
Customer
Commission Payment
Services
Dividend
IC-DISC
IC-DISC Requirements
 One class of common shares with par or stated value
of at least $2,500,
 95% Qualified Export Receipts,
 95% Qualified Export Assets,
 Maintains separate books and records,
 Must pay reasonable estimated dividend to
shareholders within 60 days of IC-DISC year end.
Who Can Benefit From an IC-DISC?
 Any privately held U.S. manufacturer or
distributor that delivers goods outside of the
U.S. that are manufactured, produced, grown,
or extracted within the U.S.
 Foreign markets include Canada and Mexico,
but do not include Puerto Rico or other U.S.
territories.
 C and S Corporations as well as
Partnerships/LLCs can benefit
Who Can Benefit From an IC-DISC (continued)?
 Architects and engineering firms that design
real estate and infrastructure projects
outside the U.S.
 Distributors of products manufactured
within the U.S.
– Both manufacturer AND distributor can benefit
– Documentation requirements apply
95% Qualified Export Receipts
 Qualified Export Receipts include the
following:
– Sales of export property or commission
generated by such sale,
– Leases of export property (not to related party),
– Related and subsidiary services (examples
include freight and installation fees),
– Architectural and engineering services for
projects located outside the U.S.
Sale of Export Property

Export property must be manufactured, produced, grown, or extracted (MPGE)
within the U.S. by a person other than the IC-DISC.
– IC-DISC cannon produce products
– Must meet one of the following:
•
•
•

20% of conversion costs are incurred within the U.S.,
Substantial transformation within the U.S., or
Manufacturing in U.S. generally constitutes manufacturing.
Export property must be ultimately delivered outside of the U.S.
– Producer can sell to distributor who ultimately delivers product outside the U.S.
•
•

Both the producer and distributor will have qualified export property.
Burden of proof on producer in distributor sale.
50% U.S. Content
– Not more than 50% of the fair market value of export property may be attributable to
foreign components.
– Labor in U.S. and conversion costs are U.S. source for 50% U.S. content rule.
– 50% test denominator is sales, NOT total costs.
Examples of Export Property
 Manufacturer produces product within U.S. and delivers to
Canada.
 Manufacturer produces product within U.S. and sells to
distributor within U.S. and distributor delivers to Japan.
 Fishing boat catches (extracts) fish within U.S. waters and
delivers to Canada.
 Scrap metal company shreds equipment used within the U.S. and
exports processed scrap to India.
 Architectural firm designs museum that is built in Korea.
95% Qualified Export Assets
 95% of the assets of the IC-DISC entity must be
qualified export assets.
 Qualified export assets include the following:
– Trade receivables (IC-DISC commission receivable)
– Sufficient working capital to operate the IC-DISC,
and
– Export property (buy-sell IC-DISC).
IC-DISC Commission Calculation
 IC-DISC commission is calculated using intercompany pricing rules set forth under Treasury
Regulation §1.994-1.
 Each of the inter-company pricing rules are
subject to very complex limitations and
grouping rules set forth the Treasury
Regulations, IRS rulings, and judicial decisions.
– Such complex limitations can also be advantageous.
IC-DISC Commission Calculation (continued)
 4% Gross Receipts Method
– Limited to Combined Taxable Income (CTI)
• CTI calculated under Treas. Reg. §1.861-8 to 17
• Not limited to CTI
• Special rule under Treas. Reg. §1.994-1(e)(1)(ii)
 50% Full-Cost CTI
 50% Marginal Cost CTI
– Congressional intent was to assist exporters in penetrating foreign
markets.
– Limited to Product Overall Profit Percentage (OPP)
– OPP can be calculated at the following levels:
• Product or part number
• Product line
• Company-wide within 2-digit NAICS Code
Commission Calculation Example - Aggregate
Export
Transaction
Gross
Receipts
COGS
Gross
Margin
SG&A
CTI
1
5,000
4,000
1,000
700
300
2
7,500
7,000
500
1,000
(500)
3
2,500
500
2,000
500
1,500
Total
15,000
11,500
3,500
2,200
1,300
4% Gross
Receipts
50% FC CTI
600
(15,000 * 4%)
$650
(1,300 * 50%)
Transaction by Transaction (TxT) Optimization
Export
Transaction
Gross
Receipts
COGS
Gross
Margin
SG&A
CTI
1
5,000
4,000
1,000
700
300
2
7,500
7,000
500
1,000
(500)
0 (Loss Transaction)
3
2,500
500
2,000
500
1,500
750 (50% FC CTI)
Total
15,000
11,500
3,500
2,700
1,300
Total TxT
Commission
Transaction Commission
200 (4% G.R.)
$950
46% Increase using TxT
Optimization – Compared to
previous slide
Filing Requirements for IC-DISC
 IC-DISC must file Form 1120-IC-DISC and supporting
schedules on an annual basis.
– Form 1120-IC-DISC is due 8 ½ months after year-end of ICDISC.
• No extensions permitted
– Supporting Schedules Include:
• Schedule K – Shareholders Statement of IC-DISC Distributions
• Schedule P – Intercompany Transfer Price or Commission
• Schedule Q – Borrower’s Certificate of Compliance with Rules for
Producers Loans (applies only to deferral)
• Form 8404 – Interest Charge on DISC-Related Deferred Tax
Liability
– Interest is paid by taxpayer, not IC-DISC (applies only to deferral)
• Form 5472 may be required for foreign shareholders (as of 2012)
Deemed v. Actual Distributions of the IC-DISC
 Deemed distribution must be distributed in year
earned by the IC-DISC
 The following are required deemed distributions:
– 1/17 of income attributable to shareholders who are C
Corporations
– 50% of income related to sales of military property
– Income that relates to participation in a boycott against
Israel
– Income that is in excess of $10,000,000 of sales that
generated the IC-DISC income
Any Questions?
?
Transfer Pricing
Mark Bellows
Tax Partner
GALLINA LLP
Email: [email protected]
Phone: (916) 784-7800
Twitter: RE_Const_CPA
www.gallina.com
Transfer Pricing
 The pricing of goods and services on
transactions between related entities.
 In theory, transfer price should match arm’s
length pricing.
 Internal Revenue Code Section 482.
– Secretary may reallocate income or expenses in
order to prevent evasion of taxes or to clearly
reflect income.
 Applies to both inbound and outbound
transactions.
Transfer Pricing (cont.)
 Documentation required. The “binder.”
 GALLINA can assist with studies,
preparation of the binder, and strategy.
Inbound Transfer Pricing Example
Fact Set
$USD
Larry Taylor Contracting, Inc.
• U.S. based window
subcontractor
• Importing from China
U.S. Revenue
$10,000,000
Window Frames
$5,000,000
Chinese Tax Rate
10%
U.S. Tax Rate
35%
Before (without transfer pricing)
Larry Taylor Contracting, Inc.
Buying semi-finished frames
$500 per frame
10,000 units
Total- $5M per year
Semi-finished frames
Revenue- $10M
Expense- $5M
Taxable income- $5M
Chinese
Supplier
After (with transfer pricing)
Larry Taylor Contracting, Inc.
Semi-finished frames
Buying semi-finished frames
$650 per frame
10,000 units
Total- $6.5M per year
Revenue- $10M
Expense- $6.5M
Taxable income- $3.5M
China Supplier
Buying semi-finished frames
$500 per frame
10,000 units
Total- $5.0M per year
Semi-finished frames
Larry’s Subsidiary
Transfer Pricing Inbound Example
Transfer Pricing Inbound Example
Before (w/o TP)
$USD
U.S. Revenue
$
10,000,000
U.S. Expenses
$
U.S. Net Income
U.S. Tax (35%)
Worldwide Total Tax
After (w/ TP)
$USD
U.S. Revenue
$
10,000,000
5,000,000
U.S. Expenses
$
6,500,000
$
5,000,000
U.S. Net Income
$
3,500,000
$
1,750,000
U.S. Tax (35%)
$
1,225,000
China Revenue
$
6,500,000
China Expenses
$
5,000,000
China Net Income
$
1,500,000
China Tax (10%)
$
150,000
Worldwide Total Tax
$
1,375,000
Tax Savings
$
375,000
One-time Set-up Fee
$
50,000
GALLINA Annual Fee
$
40,000
Client's Net Savings Yr. 1
$
285,000
Client's Net Savings Yr. X
$
335,000
$
1,750,000
Outbound Transfer Pricing Example
ACME Manufacturing, Inc.
Selling Electrical Components to China
Fact Set
$USD
Component Sales
$50,000,000
Expenses
$25,000,000
Chinese Tax Rate
10%
U.S. Tax Rate
35%
Before (without transfer pricing)
ACME Manufacturing, Inc.
Selling electrical components
$1,000 per component
50,000 units per year
Total- $50M revenue annually
Electrical
components
Revenue- $50M
Expense- $25M
Taxable income- $25M
Chinese Buyer
After (with transfer pricing)
ACME Manufacturing, Inc.
Electrical
components
Selling electrical components
$700 per component
50,000 units
Total- $35M per year
Revenue- $35M
Expense- $25M
Taxable income- $10M
Chinese Buyer
Selling electrical components
$1,000 per frame
50,000 units
Total- $50M per year
Electrical
components
ACME’s Subsidiary
Transfer Pricing Outbound Example
Transfer Pricing Outbound Example
Before (w/o TP)
$USD
After (w/ TP)
$USD
U.S. Revenue
$
50,000,000
U.S. Revenue
$
35,000,000
U.S. Expenses
$
25,000,000
U.S. Expenses
$
25,000,000
U.S. Net Income
$
25,000,000
U.S. Net Income
$
10,000,000
U.S. Tax (35%)
$
8,750,000
U.S. Tax (35%)
$
3,500,000
China Revenue
$
50,000,000
China Expenses
$
35,000,000
China Net Income
$
15,000,000
China Tax (10%)
$
1,500,000
Worldwide Total Tax
$
5,000,000
Tax Savings
$
3,750,000
One-time Set-up Fee
$
50,000
GALLINA Annual Fee
$
100,000
Client's Net Savings Yr. 1
$
3,600,000
Client's Net Savings Yr. X
$
3,650,000
Worldwide Total Tax
$
8,750,000
Any Questions?
?
FBAR Filing Requirements
Robby Walker
Partner
GALLINA LLP
Email: [email protected]
Phone: (916) 784-7800
www.gallina.com
FinCEN Form 114 – Foreign Bank
Account Report (“FBAR”)
 Created in 1970 – Bank Secrecy Act
– The Bank Secrecy Act of 1970 requires U.S. persons
to file reports and keep certain records of
information about their foreign accounts.
 Amendments in 2004 – New Penalties for NonWillful Violations, Stronger Willful Penalties.
 Amendments in 2011 – Some New Clarifications and
Modifications of Terms.
 June 30th, 2013 – Switch from Form TD F 90-22.1 to
FinCEN Form 114, which must be filed electronically.
FBAR: Who Must File (The basics)
 A U.S. PERSON that has a FINANCIAL
INTEREST or SIGNATORY AUTHORITY over
FOREIGN FINANCIAL ACCOUNTS if the
aggregate value of the foreign financial
accounts EXCEEDS $10,000 at any time during
the calendar year.
 The FBAR must be filed electronically by the
Treasury Department on or before June 30 of
the year following the reporting year.
 There is no extension available for filing an
FBAR.
FBAR: Who Must File (U.S. Person)
 U.S. citizens,
 U.S. residents,
 U.S. entities, including but not limited to, corporations,
partnerships, or limited liability companies created or
organized in the United States or under the laws of the
United States, and
 Trusts or estates formed under the laws of the United States
FBAR: Who Must File
(Financial Interest or Signatory
Authority)
 Owner of record or holder of legal title, regardless of whether
the account is maintained for the benefit of the United States
person or for the benefit of another person; or
 Owner of record or holder of legal title is one of the following:
– Agent, Nominee, Person Acting on Behalf of U.S. Person.
– Owns directly or indirectly MORE THAN 50% of value or
voting power of any corporation.
– Partnership interest in greater than 50% of profits or capital.
– Trust if beneficiary has MORE THAN 50% present beneficial
interest.
FBAR: Who Must File
(Financial Interest or Signatory
Authority… continued)
 Signature Authority
– A U.S. person has account signature authority if
that person can control the disposition of
money or other property in the account by
direct communication (whether in writing or
otherwise) to the bank or other financial
institution that maintains the financial account.
 Spouses and minor children are often required to
file an FBAR as well.
FBAR: Who Must File (Foreign
Financial Accounts)
1. Foreign: Outside the U.S.
i. Foreign Branches of U.S. Banks = Foreign
ii. U.S. Branches of Foreign Banks = Non-Foreign
2. Financial Accounts
i. Checking, Deposit, Savings, Securities, Brokerage, Demand,
Time Deposit
ii. Commodity Futures or Options Account
iii. Insurance Policy with Cash Value (whole life insurance)
a) Note: a very complicated analysis, foreign countries
have vastly different insurance arrangements.
b) Foreign Insurance Excise Tax may Apply
iv. Annuity Policy with Cash Value
v. Shares in a Mutual Fund or Similar Pooled Fund
FBAR: Who Must File (Foreign
Financial Accounts)
 Question:
– Are online gambling accounts and virtual
currencies foreign accounts?
• i.e. PokerStars, FirePay, and PartyPoker
FBAR: Penalties
 Civil penalty of $10,000 per violation
– If there is reasonable cause for the failure and
the balance in the account is properly reported,
no penalty will be imposed.
 Willfully failing to report an account may be
subject to a civil penalty equal to the greater
of $100,000 or 50% of the balance in the
account at the time of the violation and be
subject to risk of criminal prosecution.
FBAR: Voluntary Disclosure
Program (“OVDP”)
 Enables noncompliant taxpayers to resolve their tax
liabilities and minimize their chance of criminal
prosecution.
– Generally 27.5% of highest aggregate balance.
 IRS issued revised frequently asked questions regarding
the revamped OVDP in July 2014
 Reduced penalties if you enter the OVDP
– Avoid the following civil penalties
• Foreign Information Penalties: larger of $100,000 or 50% of
account balance
• Fraud Penalties: 75% of unpaid tax
– Avoid criminal prosecution
• Fail to file an FBAR: up to 10 years in prison and criminal penalties
up to $500,000
FBAR: Statistics
 Number of FBAR Filings
1991: 116,600
2001: 177,151
2004: 217,699
2009: 534, 043
– Note: More current numbers are not available.
Foreign Asset Disclosure –FATCA—
Form 8938
 Part of the 2010 HIRE Act
– A U.S. taxpayer that holds an interest in a
“specified foreign financial asset” must attach to
their tax return Form 8938 Statement of
Foreign Financial Assets if the aggregate value
of specified foreign financial assets exceeds
certain dollar thresholds.
– No Form 8938 for businesses… yet
Other Foreign Tax Filings
1.
2.
3.
4.
5.
6.
7.
8.
Form 926 – U.S. Transferor of Property to a Foreign Corporation
Form 2555 – Foreign Earned Income Exclusion
Form 5471 - Information Return of U.S. Persons With Respect to Certain
Foreign Corporations
Form 5472 - Information Return of a 25% Foreign-Owned U.S.
Corporation or a Foreign Corporation Engaged in a U.S. Trade or
Business
Form 8865 - Return of U.S. Persons With Respect to Certain Foreign
Partnerships
Form 8858 - Information Return of U.S. Persons With Respect To Foreign
Disregarded Entities
Form 3520 – Return for Foreign Trusts and Receipt of Certain Foreign
Gifts
Form 3520-A - Annual Information Return of Foreign Trust With a U.S.
Owner
Any Questions?
?

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