| Fall 2007 |
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INFOLETTER
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Partner's Perspective |
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IC-DISC: A Big Tax Break for Exporters
By Dale A. Ruther, CPA, CIT, Partner
To help jump-start exports from U.S. businesses to markets overseas, Congress
established a tax-saving program known as the Interest Charge-Domestic
International Sales Corporation, or IC-DISC, back in the 1970s. Recent tax law
changes have focused renewed attention on IC-DISC as a smart strategy for any
closely held company that sells products or services overseas.
IC-DISC can be utilized by all types of business entities, including regular
corporations, partnerships, LLCs and S corps. The net result of forming an
IC-DISC? Possible income tax reductions of 50 percent or more on export profits.
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The net result of forming an IC-DISC?
Possible income tax reductions of 50 percent or more on export profits.
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An IC-DISC is a special tax-advantaged company that is separate from the core
business itself, but usually owned by the same shareholders. Upon making an
export sale, the exporter would calculate a commission from the sale to be paid
to the IC-DISC and take a deduction for this commission, which is not subject to
income tax. The calculations are based on several alternative statutory methods,
and are similar to the ones used in the popular Extraterritorial Income
Exclusion (EIE) and Foreign Sales Corporation (FSC) programs.
Since IC-DISCs may only have a small amount of cash on hand at year-end, most
will choose to make dividend distributions of the commission directly to
shareholders. These distributions will be taxed as qualified domestic dividends,
generally subject to maximum federal income taxes of 15 percent.
This requirement may prove burdensome for some cash-flow sensitive companies.
However, there are several capital retention strategies that would enable these
companies to retain all or some of the commission in operations, thus easing the
cash flow crunch.
The potential tax-saving opportunities presented by IC-DISC make it worth a
close look by any U.S. exporter. The details, however, can be complex, which
makes consultation with a CPA or tax advisor critical.
To discuss the potential benefits of IC-DISC to your company in more detail,
please call or email me at
dale@bobermarkey.com.
BMF&C
Tax Considerations When Doing
Business Overseas
By James M. Bowen, CPA, MT,
Tax Partner
 One of the less glamorous, but most important, aspects of doing business
internationally is planning for the tax implications of overseas business
operations. For example, many U.S. companies aren’t aware of the concept of
"permanent establishment" as it relates to business activities performed in a
foreign country.
There are many different ways to "do business" overseas, and not all of them
involve setting up an actual office or plant in a foreign country. If your
foreign activities are defined as creating a permanent establishment, your
company and employees may be obligated to pay taxes in the foreign country on
profits derived from products sold and services provided there.
Beware Permanent Establishment
Most countries recognize the concept of permanent establishment, which can be
satisfied when a company merely has one or more employees located in a foreign
country for a period of time. It is not necessary to have a physical location
(e.g., office or manufacturing plant) in the country in order to be considered a
permanent establishment.
Fortunately, the U.S. has income tax treaties with many countries that define
the conditions that can create a permanent establishment. These treaties allow
companies to operate in a foreign country without creating a permanent
establishment, thus avoiding taxation. Your tax advisor can review with you the
rules for specific countries.
Being considered a permanent establishment can affect not only the payment of
taxes by your business, but also by your employees, who may be required to pay
personal income taxes to the foreign country where they performed services. This
may be the case even if the employee was paid, and taxes were withheld, in the
U.S. While the employee may be eligible for a refund from Uncle Sam of foreign
taxes paid, he or she still must pay the tax upfront.
What About Value Added Taxes?
In addition, companies with permanent residence in a foreign country may be
responsible for collecting and remitting Value Added Taxes (VATs). In Canada,
for example, there are some very specific rules dictating when foreign companies
must collect the Goods and Services Tax (or GST, Canada’s VAT). A surprising
number of companies doing business in Canada are unaware of their obligation to
collect and remit the GST.
The tax implications of doing business overseas can be extremely complex, and
vary widely from one country to another. Before embarking on international
business expansion, you should discuss your plans in detail with your accountant
or a tax professional to avoid unpleasant surprises later.
We can help you determine your potential tax liabilities in foreign countries
where you may be interested in doing business. Please call or email me at
jimb@bobermarkey.com
for more details.
BMF&C
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How To Handle Social Security Taxes
The issue of paying Social Security and Medicare taxes on wages earned
outside the U.S. is a little bit murky. Where these taxes should be paid
depends on a number of factors, such as which country you and/or your
employees will be working in and how long you’ll be in the country.
In general, U.S. Social Security and Medicare taxes do not apply to wages
for services performed as an employee outside the U.S. However,
self-employed U.S. citizens or residents are generally subject to U.S.
Social Security and Medicare taxes regardless of where the self-employment
income is earned.
The good news is that the U.S. has entered into "totalization agreements"
with 21 other countries to try to eliminate double social security taxation
and combine social securities from two or more countries. These agreements
allow employers who are transferring employees to work at a related company
(like a subsidiary) overseas to continue covering the employees in their
current social security system and opt out of the other country’s system.
To qualify, the overseas subsidiary must obtain a certificate of coverage
from the U.S.- based company verifying that its employees are covered in the
U.S. system. Then the subsidiary won’t be required to pay taxes into the
foreign company’s social security system on behalf of U.S.-citizen
employees, nor will the employees be required to pay any employee share of
these taxes to the foreign government.
For a complete list of countries with which the U.S. has totalization
agreements, visit
http://www.ssa.gov/international/agreements_overview.html.
BMF&C |
Going Global: What to
Consider When Expanding Your Business Overseas
By Paula S. DiVencenzo,
Senior Tax Manager
 In
his recent best-seller The World Is Flat, Thomas Friedman
dissects how the lowering of trade and political barriers and
the technical advances of the digital revolution have expanded
business borders like never before.
One result is that more small and mid-sized companies are venturing into the
waters of international business. Global trade offers a number of potential
benefits, including new markets, increased business exposure and prestige,
higher sales and profits, and the leveling of seasonal fluctuations in the sales
cycle. What’s more, overseas demand for products made in the United States is
stronger than ever.
Succeeding in global markets, however, isn’t as easy as slapping the word
"International" onto the company’s name. It requires a major commitment of time,
energy and resources on the part of business owners and decision-makers. Note
these five key considerations before deciding whether or not to take the plunge:
- Consider all of your alternatives first. Sometimes, companies feel
pressured to "go global" whether they’re ready to make the commitment or not.
If your goal is simply to increase sales, first look into potentially untapped
domestic markets. You could also subcontract to another company already
established in a foreign country, or partner with a foreign-based firm.
- Plan your budget carefully. There will be significant costs
involved in any effort to expand overseas. Plan a rough budget of anticipated
expenses, even if this is only a starting point, and determine how you will
fund the effort. The mere process of doing so will force you to think through
your plans carefully and anticipate many hurdles and roadblocks early.
- Evaluate your management depth. Don’t forget that while your
overseas efforts are ramping up, someone needs to be minding the store back
home. Therefore, you need to have a strong management team to ensure that your
core business doesn’t suffer while you (or key managers) focus on
international expansion.
- Recognize and embrace cultural differences. "When in Rome…" the old
saying goes. Going global requires putting this into practice. Don’t assume
that everyone all over the world does things like we do in America. The best
way to understand the culture and business practices in foreign countries is
to spend time "on the ground" there.
- Don’t ignore potential financing and pricing challenges. Keep in
mind that U.S. banks generally cannot finance assets and collateral that are
located overseas, so you will likely need significant liquid assets of your
own to support international expansion. On a related note, carefully consider
transfer pricing principles, including how you will price your products and
services overseas given foreign taxes, regulations, currency exchange rates
and other factors that may distinguish overseas sales from domestic sales.
If you are looking to take your company global, I would be happy to meet with
you to help you address the implications upfront. Please call or email me at
paulad@bobermarkey.com. BMF&C
Overseas Markets: What About
China?
By Richard C. Fedorovich,
CPA, Managing Partner
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discussion of doing business overseas wouldn’t be complete without focusing on
doing business in China. It’s hard to pick up a business newspaper these days
without reading about the growing influence of China on the world business and
economic landscape.
The statistics are undeniable: Since 1978, China’s GDP has increased
six-fold, with average annual GDP growth of almost 10 percent over this time.
Per capita output has more than quadrupled since 1991. China is now the number
three import nation in the world and the world’s fourth largest economy (behind
the U.S., Japan and Germany). In addition, bilateral trade between the U.S. and
China has almost tripled (to $328 billion) since China joined the World Trade
Organization five years ago.
The China Challenges
There’s no question that China’s huge population (currently more than 1.3
billion people) and growing middle class hold great promise for many U.S.
exporters. In addition, China’s low-cost labor force may make it attractive as a
production base, whether this means setting up a manufacturing plant there or
sourcing production to other companies based in China.
But the decision to formulate a "China strategy" should be based on more than
just jumping on the latest business bandwagon. There are significant challenges
to doing business in China, whether as a manufacturer or exporter, and
especially for companies new to the region.
Even more so than in most countries, the research and due diligence required
to do business successfully in China are enormous. Economic, regulatory and
political conditions change rapidly, and tax policies regarding inter-provincial
trade and travel are complex. Tax incentives are frequently offered to foreign
companies, for example, but these differ among provinces and regions, which are
often pitted against one another by the central government in competition for
economic growth and development.
In fact, one big mistake many companies make is viewing "China" as one huge
entity. To the contrary, China is an enormous country with as much or more
diversity as you would find between the west and east coasts of the United
States. There are vast differences between various regions: As many as 30
different ethnic groups speak several hundred dialects, and some 60 percent of
China’s population remains rural, despite the emergence of Shanghai and Beijing
as major international business centers.
Cultural Differences
It would be foolish to embark on a China strategy for your company without
careful consideration of the cultural differences between our countries. Two
good examples:
It is not uncommon for Chinese to exaggerate their resources, capabilities
and authority. (For example, all property is government owned, regardless of
what a Chinese businessperson may tell you.) This makes it critical to verify
credentials and confirm details through independent sources before finalizing
any deals or agreements.
Developing trust with overseas partners is extremely important to Chinese
businesspeople. They usually want to spend a lot of time together with potential
partners in social situations just getting to know each other before discussing
the business deal itself, so a great deal of patience is required.
Also keep in mind that China’s business environment is highly regulated, and
thus extremely bureaucratic and slow moving. Although foreigners are considered
guests in China, they are expected to comply with all Chinese government rules
and regulations.
On The Ground
For any company serious about doing business in China, there is simply no
substitute for spending time "on the ground" there. A minimum of one week in the
country, accompanied by an interpreter and an international consultant
experienced in doing business in China, is recommended. The consultant can help
identify and select contacts you should meet with (potential clients, partners,
suppliers, regulators, etc.), set up these meetings and serve as a general
go-between.
If you would like to talk further about doing business in China, I would be
happy to meet with you and help you with your assessment. Please call or email
me at rickf@bobermarkey.com.
BMF&C
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Closer To Home?
If doing business in a distant country seems a little intimidating, you
might want to consider somewhere closer to home instead—like Mexico.
With about 108 million inhabitants, Mexico is the 11th most populous
country in the world. It has a free-market economy and is firmly established
as an upper middle-income country, with the highest per capita income in
Latin America. Average labor costs in Mexico (in 2003) were $2.45 (USD) per
hour (with benefits) and are projected to rise to $3.28 per hour in 2009.
Nearly 90 percent of Mexican exports go to the United States and Canada, and
55 percent of its imports come from these two countries.
In 2006, U.S. companies exported a total of $134 billion worth of goods
to Mexico. Vehicle parts and accessories, computer accessories,
semiconductors, plastics, industrial machines and supplies, and petroleum
products were the top exports.
BMF&C |
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In this feature of InfoLetter, each quarter we provide a profile of
one of our professionals who is available to work with our clients and
friends.
David M. Wehrle,
CFA, CIRA, CTP
Partner, BMF Advisors LLC |
David Wehrle is partner and practice leader for BMF Advisors LLC. David has
more than 28 years of financial and operational experience, including seven
years of restructuring and advisory work with FTI Consulting and
PricewaterhouseCoopers’ Business Recovery Services. He has served as an advisor
to companies and has secured creditors and unsecured creditors committees in
out-of-court restructurings and in formal bankruptcy proceedings. His expertise
includes supply chain management, business plan formulation, liquidity
management, lender and creditor advisory services, advising on the sale or
purchase of businesses and assets, bankruptcy preparation, reorganization plan
negotiation and interim management.
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"Companies in distress often find themselves beset by
numerous complex problems, and recovery can challenge even the most capable
and experienced managers. BMF Advisors, backed by the extensive financial,
audit, and tax expertise of Bober, Markey, Fedorovich & Company, can offer a
fresh perspective, provide an independent assessment of the situation, and
deliver comprehensive and workable solutions." |
David has extensive experience in manufacturing and metals-related
industries. His most notable cases include Delphi Corporation, Tower Automotive,
LTV Corporation, National Steel, Rouge Steel, Ormet Corporation, Horsehead
Industries, Special Metals and Republic Technologies.
Prior to beginning his consulting career, David had more than 20 years of
industry experience, primarily with North American Refractories Company (NARCO).
At NARCO, he assumed assignments of increasing responsibility encompassing
business planning and development, treasury and risk management, enterprise
resource planning software implementation, working capital management, new
division start up, and M&A activities including modeling and participating in a
successful leveraged buyout. Prior to NARCO, he was responsible for
manufacturing processes within the Control Equipment Group of Westinghouse
Electric Corporation.
David holds an M.S. in engineering and a B.S. in materials science and
engineering from the Massachusetts Institute of Technology. He is a Certified
Turnaround Professional (CTP), Chartered Financial Analyst (CFA) and a Certified
Insolvency and Restructuring Advisor (CIRA). David is a member of the CFA
Institute, the Turnaround Management Association and the Association of
Insolvency and Restructuring Advisors. BMF&C
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