Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: We were talking about FDII last time and that there have been a few changes. What do companies need to do to really maximize their opportunities if they choose to use this incentive?

Frank: As we covered last time, the IRS has given us this long-awaited guidance, early in March, and that provides the roadmap to really take advantage of the export incentive. The computation of figuring out what the tax break or deduction is, remember it’s a 37.5% deduction that gets your corporate earnings to be at about a 13% tax rate. What our listeners seem to understand is it’s very formulaic, and so some of the advantages are in how you derive the net income from export type of activities and the provision of export services. A lot of it is in the mechanics of allocated expenses, so if you have direct costs, obviously that would be allocated. There’s a wide range of options to allocate or portion indirect costs, so things that are mixed service costs, type of thing. There’s quite a bit of leeway on how you can do it. There are opportunities in that area as well as just different aspects of the mechanics of the calculation, but that being one of the biggest drivers is the cost allocation.

Jen: Ok, so if an entrepreneur is doing business as an LLC, can they still take advantage of this?

Frank: That’s actually one of the things we’ve talked about in previous sessions is that the tax reform really heavily favors US domestic corporations. As you know, a lot of entrepreneurs, businesses that you and I cater to do business as a pass-through entity, where the owners are the taxpayers and not the entity itself. That actually is an issue. This export incentive really is limited to domestic corporations. One of the things you may think about is there’s a lot of conversation about, should I convert my pass-through entity to a C corporation or a regular domestic corporation? And the answer is, not necessarily. I wouldn’t do that just for this. What I would do is set up something separate just for the export activity. But then the question becomes, what do you do with those earnings? You can do a lot of different things; global expansion; but it could be your vehicle to further invest overseas. It could be a holding company for, let’s say, foreign subsidiaries and finance international expansion.

Jen: Ok, now are there any other low hanging fruit opportunities, if you will, for companies that do want to take advantage of this?

Frank: You really kind of dig into the details. For example, a lot of people think, well if I sell, let’s say, to a customer that doesn’t necessarily—that’s a US customer, is that an export? Or, if the particular product has further manufacturing outside the US, is that an export, and different things like that. One of the things to look at is related party sales can qualify if that related party entity, that’s typically a foreign entity, sells it to a foreign end user. So, let’s say the customer, the end customer is a foreign customer, then those would qualify. And then you can always use things like transfer pricing to maximize that intercompany transaction to supercharge the FDII.

Jen: Yeah. Well, good. We’ll get you back to talk a little bit more about this in a future session.

Frank: As we learn more and dig through the details there will be a lot more to talk about.

Jen: Great. To learn more about other international topics, visit PKFTexas.com/InternationalDesk. This has been another Thought Leader Production, brought to you by PKF Texas – The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thanks. It’s exciting to be back.

Jen: I know there’s been some new changes to the Foreign-Derived Intangible Income, or FDII, as we’ve been calling it, that released in early March. What do we need to know about the new changes?

Frank: That’s right. Even though it’s interesting about this new tax law is that, even though it was passed a little over a year ago, guidance is still trickling in. Even though a law has been on the books, usually you do planning on a go-forward basis. There is some planning to go back and see about opportunities you may not have had.

Continue Reading Following Up on FDII Changes from March 2019

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to the Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: A couple of episodes back we talked about the Foreign Derived Intangible Income incentive. How does that work?

Frank: It’s a pretty convoluted calculation. First, as we talked about last time, a company will identify its gross receipts related to this Foreign Derived Intangible Income – we call it FDII for short.

Jen: FDII, I like that.

Frank: And then, you allocate associated deductions to arrive at net income, and then you look at what is normally looked at as a normal return for a company, which is mechanically derived, is 10% of the adjusted tax basis of the assets. And then, any profits above and beyond that on this income would be excess profits subject to a special rate of tax, which would be 13.125%.

Jen: Ok, so what should companies be doing about this?

Frank: One thing would be to take a look at how they source products. If they’re sourcing product from overseas, could they get it in the United States? Or, if you are, let’s say, a U.S. subsidiary of a foreign multinational, can the foreign multinational source those goods from the United States?

Jen: So, how might this apply to services? We talked about services on a different episode as well.

Frank: A service is also an interesting thing, and we don’t have a whole lot of guidance on that just yet, but essentially it would work the same way. The interesting part is that it does not indicate in the law currently that the services actually have to be performed within the U.S. So, theoretically, they could be performed outside the U.S. as long you are not outside the U.S. long enough to create what we call a permanent establishment. In that case, it would be called branch income; it would not qualify. Intermittent services, like oilfield services, where you may be providing services for a two-week, three-week period but you don’t have a home office there, might apply to this FDII income.

Jen: So, they really should reach out to us and find out if it applies. Now, I know you’ve talked about IC-DISC in the past. Does the FDII impact the IC-DISC at all?

Frank: Interestingly enough, in the tax law change, IC-DISCs were untouched. You can actually use the IC-DISC incentive in conjunction with FDII. The thing to keep in mind is that FDII only qualifies if you are a C-corporation. If you are an S-corporation, sole proprietorship, partnership, you want to also take a look at your tax structure, because this only qualifies for C-corporations.

Jen: Frank, we’ll get you back to talk about that again. Thanks.

Frank: I’d love to come back. Thank you.

Jen: To learn more about other international topics, visit pkftexas.com/internationaldesk. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: So, last time we talked about international tax baskets with the new tax reform. What are some issues that business owners are finding with that?

Continue Reading Opportunities and Traps in the International Business Space

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thanks, Jen. Thanks for having me back.

Jen: We’ve talked about GILTI and FDII in previous episodes, and now I know there’s some more foreign impacts with the new tax reform. Is there anything else you can share with us about that?

Frank: Yes, in response to the Tax Reform Act, Treasury has had to come up with new rules for four tax credits. For example, previously, we had two types of foreign tax credit baskets. Continue Reading Foreign Tax Baskets – What to Know

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thanks, Jen. It’s great to be back.

Jen: I know there’s an incentive for exporters: IC-DISC. How has that changed with tax reform?

Frank: That’s a good question. It’s been around for quite a while, as you know, the IC-DISC is nothing new. What propelled its novelty is the tax reform of 2003 where dividend rates were now coupled with capital gains rates. There’s been legislation on and off of repealing it or modifying it or limiting it in some kind of way, but oddly enough, tax reform did not change anything with regard to IC-DISC, so it’s still a viable option for exporters.

Jen: So Frank, how can the IC-DISC be helpful for our viewers?

Continue Reading How Your Business Can Benefit from IC-DISC

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to The Playbook.

Frank: Thank you. It’s good to be back with you.

Jen: In a previous segment we went over transfer pricing, and we touched on it just a little bit, but I know we want to do a deeper dive. So, with tax reform and transfer pricing, what else do folks need to know?

Continue Reading A Closer Look at Transfer Pricing and the International Space

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Well, thanks for having me back.

Jen: So, we’ve been covering international tax reform. What else do people need to know? What haven’t we covered yet?

Frank: I think other than the Toll Tax, which is getting more immediate attention because of the timing of it, there’s also other aspects of international tax reform that tax payers need to be aware of.

For example, that there’s disparate treatment between individuals and corporate tax payers when it comes to certain provisions, such as GILTI, and we’ve talked about FDII in previous segments – the Foreign Derived Intangible Income. And so, with respect to GILTI, for example, the top individual rate is 37%, and if there’s any amount to be included from a foreign corporation that’s taxed immediately as GILTI, that’s also taxed at 37%. However, for corporate tax payers any income inclusions from GILTI is taxed at 10.5%. That’s quite a rate differential between the two.

Jen: Wow, that’s huge. I know we’ve also talked about middle market entrepreneurs. Should they stop doing business as flow-through entities? We’ve talked about that in several different videos.

Frank: That’s a great question. In fact, that’s a big question that you see the international tax community or the tax community as a whole should ask, “Is this the death of limited liability companies?” And I think the answer is, I think, companies need to really start to think about where do they want their cash; do they want it back home? Do they want to keep it offshore? Where do they need it for their operational needs?

Once you determine that then you can kind of say then maybe we can do some things like some structuring options, like doing business as a C corporation for international operations, but not for your domestic operations. I think we talked a little bit about that in previous segments. That way you can minimize the GILTI tax and also take advantage of the special 13.125% of FDII. So, those are the kinds of things tax payers need to be aware of.

Jen: Okay. Now is there an advantage though to still being an LLC at all?

Frank: There is. For domestic business the tax law does provide for LLCs – taxes, partnerships – this 20% deduction, which kind of gets individual tax payers closer to a corporate tax rate – not entirely. And then, of course, passers still avoid double taxation once the funds are admitted to the ultimate owners. So, I wouldn’t give up on your LLC yet, just examine what operations are done under the LLC and what might need to be done in another way.

Jen: Sounds good. Well, we’ll get you back to talk a little bit more about that.

Frank: Thank you. Appreciate it.

Jen: Perfect. To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our International Tax Directors. Frank, welcome back to the Playbook.

Frank: Well, thank you. It’s great to be back.

Jen: So, we’ve done a series – we talked about GILTI, we’ve talked about FDII, we’ve talked about how it’s impacted federally – but what about state income taxes?

Frank: Right. I’m glad you asked me that, because a lot of the focus on the provisions, because they are rather complicated, has been on the federal tax liability. In other words, how does that affect my 1040, my Form 1120 if I’m doing business as a corporation, but very little has been talked about as to how does that impact state taxes.

In Texas, the questions would be things like: will the state include that income in taxable income? Will it exclude it? There’re certain cases where foreign income is excluded. For Texas, probably the more straightforward, if the income is sourced outside of Texas, as what you would typically find with foreign income, it would be included in the tax base but not in the apportionment factor. So, that would have the effect of effectively excluding it.

For other states, I think the regime might be a little bit more complicated in they may use it as, you know, if you get tax relief for some of these provisions, they may add them back, because they don’t want to give state tax relief alongside of federal tax relief. Most states begin their tax base coupled with the federal tax base, and so you’ll see some decoupling from the federal provisions in that states will add back some of these deductions of federal tax.

Jen: In a previous episode you also talked about flow-through entities. How does the flow-through tax planning work with the international businesses?

Frank: That’s not gotten a lot of attention. One of the things to keep in mind is that when we talk about flow-through entities, keep in mind we’re talking about S corporations, entities that do business as partnerships, or they may be owned by a trust or something like that. Those types of entities don’t pay tax, per se, but the owners do, such as they’re high net-worth individuals, or business owners, and that’s where the tax is paid, so that’s the first thing to kind of keep in mind. The tax law came out with a provision trying to get similar results under tax reform that the regular corporations got. So, for example, if you recall, tax reform gave regular corporations a 21% tax break. Individuals doing business as a flow-through entity said, “Hey, what about me? Where’s my tax break?”

Jen: Like, “Hi, I’m here.”

Frank: Exactly. And so, they came up with a deduction called a Qualified Business Deduction under a provision called Section 199A. That provides a 20% deduction that flows through to individuals. The thing to keep in mind if those flow-through entities are doing business internationally, let’s say, through the extension of their U.S. entity, such as in the form of a branch or something like that, that income is not subject to a special tax rate. It would be taxed at 37% tax rate, as individuals are all taxed at that rate. There are some implications that that income would not get favorable treatment any different—in other words, the 20% deduction that I talked about would not apply to that foreign income.

Jen: Okay, so you’ve really got to pay attention to that. Now, we’ve talked about how this impacts middle market businesses, but what about small businesses and the tax reform and that kind of thing?

Frank: That’s a good question, because a lot of times people think the tax reform affected just big business, and only big business has to worry about the changes in tax reform. One of the things is that because small businesses kind of segue on the last question you asked me, and the last discussion we talked about, is that small businesses typically do business as a flow-through entity. The things to keep in mind is the special 20% deduction to mirror the tax break that corporations got does not apply to foreign income.

So, the question becomes, “Should I restructure for doing business internationally that’s a different structure than what I have for doing business domestically, or within the United States?” The answer we found is that it all depends on where you want that foreign income to end up. Where do you want the cash? And that’s the fundamental questions small business owners need to be asking. Not to automatically be saying, “We need to restructure,” but where is the cash going to end up at the end of the day?

Jen: And what are your ultimate business goals and how do you want to grow and that kind of thing.

Frank: That’s right, because you want to optimize that.

Jen: Perfect. Well, we’ll get you back to talk some more about that.

Frank: That’d be great. Thank you.

Jen: Thank you. To learn more about other international topics, visit pkftexas.com/internationaldesk. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Welcome back to the Playbook, Frank.

Frank: Well thanks, Jen. Great to be back.

Jen: I know you talk a lot about IC-DISC; how is that impacted by tax reform and can you give us a little overview of IC-DISC again?

Frank: That’s a great question. Kind of backing up, what IC-DISC is it’s a vehicle to provide tax incentives for exports. It’s rather dated – it was originated in the 1970s – but more recently it was used because of the difference between capital gains tax rates and dividends tax rates. Now the dividends tax rates are the same as capital gains rates, it was used to a rate arbitrage. The way it basically was you had to actually set up an IC-DISC entity; let that entity be the exporting entity.

There are different variations, whether a commission DISC or a buy/sell DISC – most people are using the commission DICSs – and the reason was that you didn’t have to change operating procedures around exports and it provided a nice tax benefit. Fortunately the tax reform did not change or repeal the IC-DISC, so that actually is still the law.

Jen:  Great, great. And so are there any considerations from tax reform that do impact it? Has it changed any rates or what does that look like?

Frank: That’s an equally great question. The answer is the benefit with the IC-DISC was really in the rate arbitrage. So now with the changing rates – so if you were an exporting company with an IC-DISC, your effective corporate rate has just gone from 34% or 35% to now 21%. So the rate arbitrage using IC-DISC is not as great – in fact it may actually be nil. If you were using a flow-through entity like an S Corporation with an IC-DISC structure, then there was a rate arbitrage as well, and that’s actually still in play because the top rate for individuals is 37% versus the capital gains rates of 23.8%. So I would say if you have – if you’ve been using an IC-DISC and your operating company is a C Corporation at the 21% rate, I would say there are other strategies to look at.

One for example is the deferral strategy where you accumulate income in the IC-DISC. Now you run into issues with paying a minimum interest charge – where the IC comes in, interest charge – but the strategy around IC-DISC does change for C Corporations, because the rate arbitrage has changed.

Jen: Okay, now for tax planning purposes, are there any other considerations with the new tax reform law? Does anything else impact the IC-DISC?

Frank: I think in addition to what I said regarding the rate arbitrage change, particularly for C Corporations, there’s this new provision we talked about in earlier videos called FDII – the Foreign Derived Intangible Income – where that income is taxed at a 13.165%. That actually can be used side by side or along with the IC-DISC. There’s no double dipping, but there’s some interplay between those two tax relief provisions.

Jen: So if you’re doing exports or considering exporting these are some things you’ll need to be paying attention to?

Frank: Absolutely.

Jen: Perfect. Well, we’ll get you back to talk about some other international topics.

Frank:  Well, thank you. I’d love to do so.

Jen: To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been a Thought Leader production brought to you by PKF Texas the Entrepreneur’s Playbook. Tune in next week for another chapter.