ECONOMIC CONSULTING SERVICES, LLC
EXTRATERRITORIAL INCOME EXCLUSION ACT
ECONOMIC CONSULTING SERVICES (ECS)
For more than a quarter of a century, Economic Consulting Services, LLC (ECS) has been a leading authority on tax, trade and customs issues. ECS has worked on behalf of multinational corporations, and both U.S. and foreign tax authorities, providing financial analysis and expert advice on a broad range of tax and trade related issues. MAXIMIZING YOUR TAX BENEFITS ECS has developed a line of customized services to assist clients in maximizing the benefits under an Extraterritorial Income Exclusion entity (ETI) or a Foreign Sales Corporation (FSC) while minimizing the time and resources necessary to achieve these results. ECS’ services enable proactive firms to minimize their tax burden. SKILLS: ECS employs highly skilled economists and accountants with expertise in financial analysis. ECS combines proficiency at developing and analyzing large transactional databases with substantial accounting and audit experience. EXPERIENCE: ECS has analyzed the transactional databases and prepared the Schedule P/Form 8873 documentation and all supporting work papers for a number of its Fortune 500 clients. INFORMATION TECHNOLOGY: ECS routinely develops customized computer programs that allow for grouping and analyzing transactions in a variety of ways to determine the tax reporting strategy that will yield the maximum tax benefit.
ETI: THE NEXT GENERATION FSC
In September 2000, Congress approved the Extraterritorial Income Exclusion Act (ETI) to replace the Foreign Sales Corporation (FSC), which provided certain tax exemptions on export profits. The ETI repeals the FSC provisions and provides transition rules.
ETI VS. FSC
For U.S. companies, the ETI produces tax benefits comparable to those under FSC. However, a foreign sales presence is no longer required. In addition, the ETI is applicable to a broader range of taxpayers than the FSC. Now, S corporations, partnerships and individuals are eligible for tax benefits under the ETI, as well as taxpayers with offshore manufacturing operations. The key feature of the ETI is its basis in the concept of extraterritorial income. Gross income attributable to foreign trading gross receipts (defined as including sale, exchange, or other disposition of qualifying trade property) is now the basis of tax relief. Moreover, the ETI expands the universe of goods eligible for exclusion. The mechanics of calculating exclusions, however, carry over several important features of the FSC. These include limitations on safe harbor methodologies, marginal costing rules, and the ability to calculate tax on a transaction-by-transaction basis or a product-grouping basis.
VISIT OUR WEB SITE:
http://www.economic-consulting.com
CONTACT US: John Derrick, Vice President Kevin Baker, Vice President Yung Lee, CPA, Economist Phone: 202-466-7720 Email: ECS@economic-consulting.com
EXPERT ADVICE
Depending on your needs, ECS can provide anything from an initial benefit assessment to a full-scale study of your benefits under FSC/ETI. With our built-in flexibility, our services can be tailored to meet your company’s circumstances. SOPHISTICATED PRICING ASSESSMENT AND FEASIBILITY STUDY: A high percentage of corporations use an “aggregate” method to determine their FSC/ETI benefit. Due to a company’s variability in profitability and other factors, the tax benefit is most likely not being maximized under this approach. ECS offers a basic assessment of the potential benefits of using a more sophisticated pricing strategy (T-by-T, marginal costing, more specific product grouping, etc.) with readily available data. In addition to the basic assessment, ECS can provide a feasibility study of whether a more sophisticated pricing strategy would be viable given the company’s available data and circumstances. DATA ANALYSIS STUDY: Companies with data collection systems already in place may require ECS’ proprietary analytical tools to maximize their FSC/ETI tax benefits. ECS can analyze the company’s selfprepared data and identify the grouping and administrative pricing method that maximizes the taxpayer’s benefits. ECS can provide all necessary documentation to support these calculations in the event of an audit and to meet the IRS’ filing requirements. FULL-SCALE STUDY: For companies wishing to outsource the full responsibility of reporting FSC/ETI requirements, ECS can work with the company’s accounting and information systems personnel and legal counsel to develop each of the requisite pieces of information including the final transactional database. Once the transactional database and supporting schedules have been prepared, ECS will perform the same steps outlined above for the data analysis study. REDETERMINATION STUDY: ECS can also analyze a company’s past FSC and IC-DISC returns and prepare a redetermination if the study yields a higher tax benefit. The most likely redetermination studies would be associated with three items: G identifying additional qualifying sales; G implementing marginal costing to maximize benefit; and G determining the most appropriate expense allocation method.
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TAX SAVINGS ECS’ expert tax advice can save your company money in two ways: increasing your tax benefits and providing first rate service at a fraction of the cost charged by our competitors. As a case in point, ECS recently prepared a sophisticated pricing assessment study for a large multinational firm (ABC Inc.). ABC Inc. had historically employed an “aggregate” approach to calculate its FSC commission and tax benefit. ABC Inc. retained ECS to determine the potential increase in tax benefits from utilizing more sophisticated pricing strategies. ECS first analyzed ABC Inc.’s export sales and cost data using a broad “division and product line” approach. ECS then created a transactional database for ABC Inc. to employ a T-by-T approach.
The change from an aggregate approach to a product line approach increased the tax benefit to ABC Inc. by 50 percent. By moving to a T-by-T approach, ABC Inc.’s tax benefit increased by 200 percent. ECS’ professional fees were less than 10 percent of the amount that would have been charged by a major accounting firm that served as ABC Inc.’s auditor. ECS carried out this project for fees that were based on its effort, not on the client’s tax savings.
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AN EYE ON THE BOTTOM LINE