TAX INCENTIVES FOR EXPORTING
TAX INCENTIVES FOR EXPORTING
A prominent tax attorney once said, "Business in America? It's all about taxes." International business is no exception.
Taxes on income derived from international trade are in accordance with current laws for other income except that tax incentives for exporting are substantial. No tax incentives apply on imports.
Tax incentives for exporters amounts to approximately a 15% exclusion of the combined taxable income earned on international sales. The tax law provides for a system of tax deferrals for Domestic International Sales Corporations (DISCs) and Foreign Sales Corporations (FSCs).
Prior to December 31,1984, the DISC was the only medium for distributing export earnings. DISCs don't require a foreign presence, and, in fact, are legal entities established only on paper. The Revenue Act of 1971 created the DISC incentive and provides for deferral of federal income tax on 50% of the export earnings allocated to the DISC, with the balance treated as dividends to the parent company. Since its enactment, the DISC has been the subject of an ongoing dispute between the United States and certain other signatories of the General Agreement on Tariffs and Trade (GATT). Other nations contended that the DISC amounted to an illegal export subsidy because it allowed indefinite deferral of direct taxes on income from exports earned in the United States.
Under new rules put into effect on the 1st of January, 1985, to receive a tax benefit that is designed to equal the tax deferral provided by the DISC, exporters must establish an office abroad. The FSC also must be a foreign corporation, maintain a summary of its permanent books of account at the foreign office, and have at least one director resident outside of the United States. Meeting the requirement of the new regulations isn't difficult for big United States-based multinationals with overseas offices and ample resources, but thousands of small businesses involved in international commerce are concerned about administrative costs and other overhead. Actually, small exporters have several options for their foreign sales operations. They may continue to export through a DISC, paying an interest charge on the deferred income, or they may join together with other exporters to own an FSC. Another alternative is that they may individually take advantage of relaxed, small FSC rules, under which they need not meet all of the tests required of large FSCs. A small FSC, one with up to $5 million of gross receipts during the taxable year, is excused from the foreign management and foreign economic process requirements.
The mechanics of setting up a DISC or FSC are somewhat complex, but within the capability of most accountants. Some 23 foreign countries, those that have an agreement to exchange tax information with the United States and United States possessions, like the Virgin Islands, Guam, and Saipan, have established offices that are capable of providing direct assistance in setting up an FSC.
EXPORT TRADING COMPANY ACT
The law passed this act on October 8,1982, designing it to encourage the formation of Export Trading Companies. It establishes an Office of Export Trading Company Affairs at the Department of Commerce, permits banker's banks and holding companies to invest in ETCs, reduces the restrictions on export financing provided by financial institutions, and modifies the application of the antitrust laws to certain export trade.
Exporters with up to $10 million of annual exports may continue to operate through DISCs, generally under the present rules. But they must pay an annual interest charge on the amount of tax that would be due if the post-1984 accumulated DISC income were included in the shareholder's income. This interest is imposed on the shareholders and paid to the Treasury of the United States.
Multiple exporters, up to 25, may jointly own an FSC and, through the use of several classes of common stock, divide the profits of an FSC among the several shareholders.
SUCCESS STORY—TAX ADVANTAGE.
A construction engineering company formed an Export Trading Company (ETC) and exported the services of many other smaller construction service companies (architects, engineers, etc.) to Asia. To take advantage of the tax exclusion and deferral opportunities on their increased profits, they set up an FSC on the island of Saipan in the Western Pacific.
A prominent tax attorney once said, "Business in America? It's all about taxes." International business is no exception.
Taxes on income derived from international trade are in accordance with current laws for other income except that tax incentives for exporting are substantial. No tax incentives apply on imports.
Tax incentives for exporters amounts to approximately a 15% exclusion of the combined taxable income earned on international sales. The tax law provides for a system of tax deferrals for Domestic International Sales Corporations (DISCs) and Foreign Sales Corporations (FSCs).
Prior to December 31,1984, the DISC was the only medium for distributing export earnings. DISCs don't require a foreign presence, and, in fact, are legal entities established only on paper. The Revenue Act of 1971 created the DISC incentive and provides for deferral of federal income tax on 50% of the export earnings allocated to the DISC, with the balance treated as dividends to the parent company. Since its enactment, the DISC has been the subject of an ongoing dispute between the United States and certain other signatories of the General Agreement on Tariffs and Trade (GATT). Other nations contended that the DISC amounted to an illegal export subsidy because it allowed indefinite deferral of direct taxes on income from exports earned in the United States.
Under new rules put into effect on the 1st of January, 1985, to receive a tax benefit that is designed to equal the tax deferral provided by the DISC, exporters must establish an office abroad. The FSC also must be a foreign corporation, maintain a summary of its permanent books of account at the foreign office, and have at least one director resident outside of the United States. Meeting the requirement of the new regulations isn't difficult for big United States-based multinationals with overseas offices and ample resources, but thousands of small businesses involved in international commerce are concerned about administrative costs and other overhead. Actually, small exporters have several options for their foreign sales operations. They may continue to export through a DISC, paying an interest charge on the deferred income, or they may join together with other exporters to own an FSC. Another alternative is that they may individually take advantage of relaxed, small FSC rules, under which they need not meet all of the tests required of large FSCs. A small FSC, one with up to $5 million of gross receipts during the taxable year, is excused from the foreign management and foreign economic process requirements.
The mechanics of setting up a DISC or FSC are somewhat complex, but within the capability of most accountants. Some 23 foreign countries, those that have an agreement to exchange tax information with the United States and United States possessions, like the Virgin Islands, Guam, and Saipan, have established offices that are capable of providing direct assistance in setting up an FSC.
EXPORT TRADING COMPANY ACT
The law passed this act on October 8,1982, designing it to encourage the formation of Export Trading Companies. It establishes an Office of Export Trading Company Affairs at the Department of Commerce, permits banker's banks and holding companies to invest in ETCs, reduces the restrictions on export financing provided by financial institutions, and modifies the application of the antitrust laws to certain export trade.
Exporters with up to $10 million of annual exports may continue to operate through DISCs, generally under the present rules. But they must pay an annual interest charge on the amount of tax that would be due if the post-1984 accumulated DISC income were included in the shareholder's income. This interest is imposed on the shareholders and paid to the Treasury of the United States.
Multiple exporters, up to 25, may jointly own an FSC and, through the use of several classes of common stock, divide the profits of an FSC among the several shareholders.
SUCCESS STORY—TAX ADVANTAGE.
A construction engineering company formed an Export Trading Company (ETC) and exported the services of many other smaller construction service companies (architects, engineers, etc.) to Asia. To take advantage of the tax exclusion and deferral opportunities on their increased profits, they set up an FSC on the island of Saipan in the Western Pacific.
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