Podcast: How to Optimize using Transfer Pricing – IC-DISC

On this episode of Weaver: Beyond the Numbers, Vince Houk and Josh Finfrock discuss an export incentive under the IC-DISC regime and how to optimize that using transfer pricing.

Key Points:

• Based on arm’s length services, expense allocation methodologies can increase the benefit of the IC-DISC export incentive through a more granular and factual review of activities.
• In stewardship related activities, companies often allocate too high of an expense burden to the IC-DISC income where an arm’s length allocation methodology may help increase the benefit realized by the IC-DISC export incentive.

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00:00:00

Vince: Welcome to another edition of Weaver: Beyond the Numbers, I’m Vince Houk, partner-in-charge of international tax. Today we will be discussing tax opportunities for businesses with cross-border transactions. We’re going to dive in on an export incentive under the IC-DISC regime and how to optimize that using transfer pricing.

To discuss this topic today, I have a very special guest, Mr. Josh Finfrock. Josh, welcome to the show.

00:00:30

Josh: Thanks for having me, Vince.

00:00:31

Vince: Great to have you here today. Before we get started, I’m just going to give a quick intro into what an IC-DISC is. So IC-DISC is an export incentive that provides for permanent tax savings, and it’s really one of those where you can be a corporation, you can be a flow through entity such as a partnership or an S-corporation and you get the benefit. The benefits are a little bit different, but nonetheless, there’s a benefit for pretty much any entity type there is. The only thing with an IC-DISC is that normally a lot of our clients are set up to where the DISC is a commission agent, and it’s really a shell company that has no substance. So typically transfer pricing doesn’t even apply.

So, you may be asking, well, how is transfer pricing going to help? Because normally this is the one tax incentive that does not fly in the face of transfer pricing, right? It really doesn’t even require transfer pricing to derive a benefit. So how would we optimize that using transfer pricing?

00:01:29

Josh: Transfer pricing is one of those things that it’s in the IC-DISC regulations is a method for certain types. But when you talk about the commission DISC with limited substance there, we’re not going to see that method as often. But when you’re coming up with either that 4% commission or the 50% net income segment on the qualified exports, one of the things we like to do is, our tax guys often want to make this simple in the compliance process and efficient, pro rata allocation of G&A expenses and those kinds of things. But what we find is if we really take a more granular approach, we can dig in on that and within the way the rules are written, it really points to an arm’s length kind of concept for how to allocate those G&A costs. We can take segment by segment different expenses and find categories that we think maybe over allocating expense to that segment, which is increasing the benefit of the DISC when you can find those opportunities.

00:02:20

Vince: So basically one of the ways to calculate that commission is using 50% of net income. I think you’re talking about looking at the expenses, right? Because I think this is overlooked by a lot of our clients because a lot of times, to be honest, I think they’re just doing a peanut butter spread based on gross income or something, and they’re not really putting a lot of thought into it. But I think as you put thought into it and think about expense allocation because expense allocation can drive it, the more expenses we can take away from the export cells, the more our benefit will go up.

00:02:51

Josh: Right. For example, we might look at a concept in the transfer pricing rules where genuine benefit does need to be provided to do allocations within transfer pricing concept. If we have stewardship-related activities, maybe those are costs we don’t allocate at all or allocate to a different segment. That may be an easy opportunity for some savings.

00:03:10

Vince: Yeah, that’s very interesting. That’s great to hear, Josh. To be honest, before we had talked the other day, I had no clue that transfer pricing would be an element when you think about IC-DISC, I think this is a great opportunity for companies to look at when they’re looking at ways to maximize their export incentive.

That’s our show. Stay tuned for the next edition of Weaver: Beyond the Numbers, where we will continue to discuss tax solutions and opportunities for your cross-border activities.