IC-DISC Strategies: Mastering the Complex Operational ...

1 IC-DISC strategies : Mastering the Complex Operational Challenges Anticipating IRS Audit Risks, Calculating Commissions, and Tackling Computational Intricacies THURSDAY, FEBRUARY 12, 2015, 1:00-2:50 pm Eastern WHOM TO CONTACT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN. IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Record verification codes presented throughout the seminar.

2 If you have not printed out the Official Record of Attendance , please print it now. (see Handouts tab in Conference Materials box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Complete and submit the Official Record of Attendance for Continuing Education Credits, which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. To earn full credit, you must remain connected for the entire program. Sound Quality When 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, please e-mail immediately so we can address the problem. Viewing Quality To maximize your screen, press the F11 key on your keyboard.

3 To exit full screen, press the F11 key again. FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to Conference Materials in the middle of the left-hand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides and the Official Record of Attendance for today's program. Double-click on the PDF and a separate page will open. Print the slides by clicking on the printer icon. FOR LIVE EVENT ONLY IC-DISC strategies : Mastering the Complex Operational Challenges Thursday, Feb. 12, 2015 Neal Block Baker & McKenzie Jerry Jonckheere Plante & Moran Jerry Ogle Ogle International Tax Advisors Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

4 You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 5 Today s Program Fundamental Concepts Of IC-DISCs [Jerry Jonckheere] Implementing Various Ownership Structures For IC-DISCs [Neal Block] Compliance And Reporting By IC-DISCs [Jerry Ogle] Slide 7 Slide 25 Slide 26 Slide 69 Slide 70 Slide 82 FUNDAMENTAL CONCEPTS OF IC-DISCs Jerry Jonckheere, Plante Moran 8 Domestic International Sales Corporations (DISCs) Background and tax benefits of DISCs General review of tax benefits of DISCs How the DISC came to be Requirements of a DISC Initial requirements Annual requirements Export property Other considerations 9 Domestic International Sales Corporations (DISCs) DISC benefit arises as follows: Commissions paid to a DISC reduce taxable profit of related supplier corporation deductions at ordinary rates) DISC is tax-exempt entity Sect.

5 991 income can be deferred DISC dividends received by individual shareholders are qualified dividends taxed at the capital gains rate Income can be taxed at lower capital gain tax rates 10 Commission reduces taxable profit passed through to S corporation shareholder (up to tax savings). DISC is not subject to tax. S corporation shareholders pay 20% tax on DISC dividends. Shareholders may be subject to an interest charge for the tax deferral on DISC earnings not distributed General Review Of DISCs: Pass-Through Structure Shareholders S Corporation DISC Commission Dividend 11 General Review Of DISCs: C Corporation Structure Commission reduces taxable profit of C corporation (up to 35% tax savings) DISC is not subject to tax C corporation shareholders pay tax at 20% on DISC dividend Shareholders are subject to an interest charge for the tax deferral on DISC earnings not distributed Shareholders DISC Commission Dividend C Corporation 12 How DISCs Came To Be 1971: Congress enacted DISC provisions tax on DISC income was deferred until it was repatriated 1970s 1980s: European Union (EU) challenged DISCs as allegedly violating General Agreement on Tariffs and Trade (GATT) 1984.

6 Congress enacted foreign sales corporation (FSC) provisions FSCs exempted a percentage of export income from income tax DISC was modified to allow deferral of DISC income from annual maximum of $10 million of export receipts but interest charges on deferral (the DISC became the IC-DISC ) 13 How DISCs Came To Be (Cont.) Late 1990s: European Union (EU) members complain to World Trade Organization (WTO) that FSC represents an illegal export subsidy, but DISC was not challenged 2000: Congress repeals FSC tax scheme and enacts extraterritorial income exclusion (ETI or EIE); EU immediately lodged complaints 2003: Congress enacts favorable dividend tax rates for individuals Tax rate on qualified dividends drop from 35% to 15%, creating an opportunity for permanent savings 14 How DISCs Came To Be (Cont.) 2004: Congress repealed ETI 2006: IRS becomes aware of DISC planning and is looking for revenue raising provisions and proposes legislation to treat DISC dividends as not qualified but the legislation is not passed 2007: Repeal of capital gain rate for DISC dividends is proposed but not passed.

7 Dec 31, 2012: Favorable dividend tax rates were to sunset but legislation extends favorable qualified dividend rate Rate increased from 15% to 20% 15 DISC Initial Set-Up Commission DISC vs. buy/sell DISC Domestic corporation (C corporation) Must be a domestic corporation incorporated under the laws of any state or the District of Colombia Determine state tax implications Single class of stock $2,500 capital Required by last day to elect IC-DISC status 16 DISC Initial Set-Up (Cont.) Form 4876-A election File within 90 days from the beginning of tax year or inception of entity Establish books and records by the end of first year of operation 17 DISC Annual Maintenance 95% qualified gross receipts test 95% qualified export assets test $2,500 capital on each day of tax year Timely payment of commission to IC-DISC File IC-DISC income tax return Maintain IC-DISC books International boycott reporting 18 DISC Annual Maintenance (Cont.) 95% qualified gross receipts test Qualified gross receipts are at least 95% of IC-DISC gross receipts for the year.

8 Qualified gross receipts: Sale, exchange or other disposition of export property Lease or rental of export property used outside of Related and subsidiary services Dividends from related foreign export corporation Interest on obligations that are qualified export assets , producer s loans Engineering and architectural services 19 DISC Annual Maintenance (Cont.) 95% qualified gross receipts test (Cont.) Other receipts to consider Sales made to distributors Sales made to foreign disregarded entities Excluded receipts Export property is for ultimate use in the The sale, lease, etc. is accomplished by a subsidy of the government. The export property is for the use by the US government, where the use is required by law or regulation. 20 DISC Annual Maintenance (Cont.) 95% qualified export asset test At least 95% qualified export assets at year-end are qualified. Categories of export assets Export property Working capital Only amount necessary for required working capital Commission receivable Stock or securities of related foreign export corporation Producer s loans 21 DISC Annual Maintenance (Cont.)

9 Commission payment Payment of initial commission estimate within 60 days of DISC s year-end (March 2, calendar year). Any unpaid commission must be paid within 90 days of finalization. Unpaid amount cannot be more than original estimate , estimate must be at least 50% of final. File IC-DISC return (Form 1120- IC-DISC ) Due within 8 months of year-end Maintain IC-DISC books and records 22 Export Property For DISC ( ) Manufactured, produced, grown or extracted in the by a person other than a DISC Held primarily for sale, lease or rental for direct use, consumption or disposition outside the Not more than 50% of fair market value of the export property can be attributable to foreign content. Consider qualified export property sold to distributors 23 Other Considerations DISC commission reduces QPAI deduction. Relates to the deduction for domestic production activities DISC commission reduces profit on foreign title transfer sales. [Sect.]

10 863(b)] May reduce foreign tax credit limitation Provide for deferred tax on accumulated DISC income (FAS 109/APB 23) State income tax considerations 24 Problems? Failure to file Form 4876-A timely 9100 relief Distribution needed to meet qualification requirements Deficiency distribution Failure to meet 95% qualified export asset test and 95% qualified gross receipts test, as well as timely paying commission Equal to amount of taxable income attributed to the non-qualified portion Deemed reasonable cause if paid on or before 15th day of ninth month after year or within 90 days of an IRS request If paid after, interest in the amount equal to of distribution [ 992(c)(2)(b)] Slide Intentionally Left Blank UPDATED IC-DISC OWNERSHIP STRUCTURES AND SAVING THE DISQUALIFIED DISC Neal Block, Baker & McKenzie 2015 Baker & McKenzie LLP - 27 Overview of this Section Structuring Privately-held company: C Corp, S Corp, partnership, LLC taxed as a partnership Closely Held and Publicly-traded C corporation deferral Individual Retirement Account (IRA) and Roth IRA Estate planning, executive compensation Treaty benefits Sourcing benefits Saving The Disqualified DISC 9100 Relief Additional Qualified Assets and Additional Liabilities Deficiency Distribution 2015 Baker & McKenzie LLP - 28 C Corporation Dividends to C Corp Shareholders subject to corporate tax at approximately 35% Recommended that IC-DISC be owned directly by the individual shareholders of the C corporation so they can avoid double taxation and receive dividends at capital gains rate Where Exporter Shareholder include C Corporations, or Tax Exempt Entities, alternative structures may be used for their ownership.