 Hello and welcome to the session in which we will discuss the interest charge domestic international sales corporation known as IC disk What is the purpose of IC disk? It's to promote export. So we want to encourage we want to give incentive to US companies to participate in export activity. Why? Because export does what? Promote economic activity in the US promote employment. We have more business activities In this concept of promote an expert is similar to the foreign derived intangible income deduction the FDII that we looked at earlier What what happened under the FDII? The government gives you a deduction. Well, the same concept is here They're gonna give you a tax incentive some sort of a deduction that's gonna encourage you That's gonna give you incentive to do what to sell Internationally, let's go ahead and get started before we proceed any further I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam Myles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of Lectures multiple choice questions through false questions as well as exercises. Go ahead start your free trial today So the IC disk framework allow exporting companies to do what to convert Portion of their income, which is ordinary income, which can which could have been taxed at a regular corporate rate Into dividend taxed at a lower rate thereby achieving tax saving So all what's doing it's giving you Attack savings. It's gonna give you also a small deduction. Let's see how it works. So One benefit of it is it's gonna be a tax efficient commission structure So what you have is this you will have a company. That's a manufacturing company a manufacturing company Then this manufacturing company will set up another corporation That's called IC disk. I see disk Manufacturing and here's what happened a US based exporting company can pay a commission to this Special purpose entity to this company that we just created basically. It's a special purpose entity They will pay them a commission some sort of a commission this payment is tax deductible So whatever you paid, let's assume you paid ten thousand dollar or a hundred thousand dollar Well, this one hundred thousand dollar becomes a deduction for the manufacturing company Effectively reducing their taxable income. That's the first. That's the first thing then this SPE the tax exempt of the IC disk the s the eye IC disk that we created here is a tax exempt entity It does not incur taxes on commission income It received from the exporting company from the manufacturing company and this unique feature at what makes it more as An attractive tax strategy. Why you're gonna see Whatever we or whatever we get paid from the manufacturing company We're gonna turn this into a dividend and we're gonna pay the shareholders of this SPE the dividend and the dividend is taxed at a lower Rate so technically we took some ordinary income from the manufacturing company and we turn it into dividend So when the IC disk distribute its income to the shareholders These distribution are taxed at a favorable rate Typically as qualified dividend or long-term capital gain, which are lower than ordinary income tax rate Now you might be saying why don't we pay all our expert income to this? To this SPE to this IC disk and the answer is you can't do that there are obviously limitation Otherwise all exporter will do that in the US, but you can't do that But our limitation to the amount of commission that can be Paid to the IC disk the permissive the permissible Commission is capped at the higher of two computation. It's either 50% of the net income from the X export sales So you look if you look at your export sales minus cost of goods sold minus your operating Expenses and what's left either 50% of net income or 4% of the gross sales of the gross sales Whichever is higher you can pay as a as a As a can as a commission to this IC disk and we'll look at an example Also, the product has to be eligible for this arrangement referred to as export property They must need certain criteria to qualify. So simply put there's a list of IRS But one of them is the product has to be manufactured in the US 50% or more of it in the US using US material the whole purpose of this Tax incentive is to encourage business activities But let's take a look at an example to see in numbers how it works because it's it's like an art concept So basically what you do is you create a this fictitious company You pay a commission to this fictitious company You'll get a deduction for that then this fictitious company will distribute the what you pay them to shareholders as dividend Which are taxed at a lower rate So a company in the US called tech export which manufacture innovative electronic devices and export them worldwide To leverage the benefit of IC disk they created an entity called global sales IC disk This is the SPA. So basically simply put they created another corporation and what they did is they is They're gonna make a payment to that corporation and a given year This tech export which is the manufacturing company that export the product makes 10 million in sales from exporting its devices Well, they decided to pay a commission and let's assume they use the 4% gross revenue method It's higher than the 50% of net income. Well What they did they transfer $400,000 from their company to this global sale IC disk Well, what did what happened there? They got a tax deduction right there from their income They reduced their taxable income by 400,000, which is good Then this 400,000 goes into this tax exempt entity received $400,000 commission, but it does not be any corporate taxes on it because it's tax exempt Then what we'll do we're gonna turn around and distribute this 400,000 to the shareholders as dividend from this SPA Global sales IC disk. Well, assuming 15% on average, that's the taxes that they pay Well, they would end up paying only $60,000 in Taxes the shareholders versus of that money was ordinary income. The tax rate would be much higher So if we can see through this arrangement or through this example, we reduce our taxable income by $400,000 Meanwhile, the shareholders of the this SPE, which is most likely will be shareholders of the main company only paid $60,000 in taxes on the dividend received Which is will be lower as if they retain the profit of $400,000 with the main company the tech expert at the corporate rates This is a simplified example, but it shows you how things work how things work in the IC Disc, let's take a look at this multiple choice questions from farhat lectures.com Which of the following entities is most likely the benefit from establishing an IC disk? Is it a domestic company providing online services exclusive to US customers? Well, it's the purpose of the IC disk. Well is to promote export. Well, this doesn't look like export So A is out a US based nonprofit organization exporting educational material. Well, it's already in nonprofit Organization so nonprofit, you don't have to worry about taxes. That's there's no incentive to do anything here a US based manufacturer exporting goods Internationally, so we have an exporter. It's a US company going selling internationally This is a good answer choice a foreign corporation important goods to the US not at all We're not gonna give them any deduction. We're gonna give a US based manufacturer Export them internationally some sort of a tax advantage. What should you do now? You want to go to farhat lectures look at additional mcqs additional resources? That's gonna help you prepare for the CPA exam be better in your accounting courses prepare for your professional Certification invest in yourself. Good luck study hard and of course stay safe