Many U.S. plastics manufacturers of all sizes and ownership structures are reviewing their business operations in light of tax reform. One popular issue, outlined in this publication earlier this year, is the reshoring of foreign manufacturing to the U.S. to take advantage of newly lowered federal income tax rates. These manufacturers will now be exporting from the U.S. to continue serving their foreign customer bases.
In our practice, we've been asked to assist our plastics industry clients with financial modeling around both tax reform and reshoring of foreign manufacturing. What we don't see in most models that we review are tax incentives and strategies readily available to U.S. exporters that provide further economic benefits beyond the lowered tax rates.
A detailed discussion of each available incentive is outside the scope of this article as well as how each incentive helps plastics industry clients at each stage of their supply chain. However, we will discuss below which incentives are most often overlooked to help ensure that they are included in your modeling and/or economic analysis.
Interest Charge Domestic International Sales Corp.
IC-DISC has been part of the U.S. tax lexicon for many years in one form or another. It's long been a profitable tax strategy for closely held plastic manufacturers and distributors with export sales. It also benefits engineering services provided to foreign customers. In its simplest form, IC-DISC provides reduced U.S. tax rates to U.S.-based exporters who comply with various requirements that shouldn't impact operations or supply chain structures. IC-DISC benefits include income deferral and retirement planning.
Foreign Derived Intangible Income
FDII was enacted as part of tax reform to benefit U.S. C corporations with export sales. Although complicated in practice, the bottom line is a new benefit to U.S. C corporations for using U.S.-based intangible property that they've owned all along. Even better, they don't have to patent, copyright or even identify the intangible property as the benefit is derived from a deemed return on assets calculation. For U.S. C corporations that sell goods and/or provide services to foreign customers, this deduction reduces the effective tax rate on qualifying income to 13.125 percent rather than the new 21 percent corporate rate.
Value Added Tax
VAT is a foreign tax levied on U.S. imports by almost every major U.S. trading partner, including Canada, which levies a goods & services tax (GST) that operates similarly to a VAT. The most common VAT issue U.S.-based exporters encounter is an unexpected VAT liability. When this happens, and the U.S. exporter is charged with a VAT, profits can be reduced or eliminated and the U.S. exporter can be taken out of the local market by having to increase their selling price, or reduce their margins on export sales, due to unexpected VAT. The good news is that VAT liabilities can be managed or eliminated with proactive planning.
Customs & Duties
Like VAT, customs & duties levied upon imports into a foreign country are often simply considered a cost of business for U.S. exporters of plastic goods and materials. Customs & duties can be managed properly by being proactive when exporting goods. This can be as simple as ensuring NAFTA qualification or making sure that the exported goods are classified at the most favorable classification, or rate, permitted by the importing country.
These are just a few of the tax incentives and strategies out there to make U.S.-based plastics exporters more profitable and competitive. The key to success is working proactively with your tax adviser and making sure the economic element of these incentives and strategies are an integral part of your business export strategy.
Frank J. Vari is the practice leader of FJV Tax.